'Top Pick' Toll Brothers Inc (TOL) Keeps Pre-Earnings Options Bears On Edge

With quarterly earnings due tomorrow morning, Toll Brothers Inc (NYSE:TOL) has seen an influx of bearish options betting of late

Dec 5, 2016 at 10:56 AM
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Ahead of tomorrow morning's quarterly earnings report, Toll Brothers Inc (NYSE:TOL) saw its stock included on Barron's "Top 10 Stock Picks for 2017" (subscription required). The financial news outlet said it would "rather play an improving economy," and that TOL "looks inexpensively priced" based on its price-to-earnings ratio. And while TOL stock appears to be capitalizing on this bullish outlook -- last seen up 3.1% at $30.22 -- options traders have been bracing for a quick post-earnings retreat for the homebuilder.

At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for instance, TOL's 10-day put/call volume ratio of 1.62 ranks just 11 percentage points from a 52-week peak. Simply stated, puts have been bought to open over calls at a faster-than-usual clip in recent weeks.

Drilling down, TOL's weekly 12/9 28.50-strike put has seen the biggest rise in open interest over this time frame, with 5,346 contracts added. According to Trade-Alert, the majority of this activity occurred last Friday, when several sweeps of the weekly 12/9 put were bought to open. In other words, traders are anticipating a retreat below $28.50 by this Friday's close, when the series expires.

Today, TOL puts are crossing at nine times what's typically seen at this point in the day, with over 1,900 contracts traded -- slightly more than the 1,870 calls that are on the tape. Most active is the stock's December 30 put, where it seems safe to assume new positions are being purchased, as speculators bet on TOL breaching the round $30 mark by front-month options expiration at next Friday's close.

The skepticism toward TOL has been building among traders outside of the options arena, as well, with short interest up 8.9% in the most recent reporting period. Nevertheless, these bearish bets account for a low 5% of the security's available float -- and the stock could encounter fresh headwinds, should short sellers continue to climb on board.

In fact, today's price action notwithstanding, TOL stock has put in a dismal technical performance over the long term. Outside of a late-August gap to its year-to-date high of $32.25, the security has repeatedly been contained in the $30-$31 neighborhood, with the lower end of this range representing a 10% year-to-date decline. What's more, the shares of TOL are currently hovering around their negative 20% year-over-year return.

Meanwhile, it's a flip of the coin as to which direction the stock may move after Toll Brothers Inc (NYSE:TOL) unveils its quarterly results tomorrow, considering the shares have turned in a positive post-earnings performance in four of the past eight quarters. On average, TOL stock has swung 6.3% -- regardless of direction -- in the session subsequent to reporting, less than the 8.7% post-earnings move the options market has priced into tomorrow's trading.

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