Breaking Down an Intriguing Bullish Play for Fall

A shift in sentiment could provide tailwinds, too

Sep 16, 2020 at 10:28 AM
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Homebuilding name Toll Brothers Inc (NYSE:TOL) is trying to break out of a small flag/wedge-like pattern on the charts. The shares' ascending 40-day moving average contained pullbacks all summer. There's additional support that has recently come into play at both the stock's +10% year-to-date and year-over-year breakeven levels, making TOL an intriguing bullish play going into the fall.

TOL chart Sept 16

A shift in sentiment among analysts could provide tailwinds. Of the 13 brokerages in coverage, 9 dole out "hold" or worse ratings. And while short sellers have been in covering mode since May, a healthy 6.4% of TOL's total available float is still sold short. Considering short interest was near its highs back in May, there's ample more pessimism to unwind and push the equity higher.

What's more, the stock's Schaeffer's Volatility Scorecard (SVS) sits high at 86 out of 100. This means TOL has tended to exceed option traders' volatility expectations during the past year -- a boon for option buyers. Our recommended call option has a leverage ratio of 4.1 and will double in a 24.1% rise in the underlying equity.

Subscribers to Schaeffer's Weekend Trader options recommendation service received this TOL commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters. Learn more about why Weekend Trader is one of our most popular options trading services.

 

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