Toll Brothers (TOL) – Time to be Bearish on Homebuilders?

Previously we reported on Jim Cramer’s negative view of the homebuilding industry, “Jim Cramer Bullish on Oil Industry – Part Manufacturers Hanover Compressor (HC) and Universal Compression (UCO)”. This sentiment was reflected in the quote, “I see profit taking emanating initially from the real estate investment trusts.”

Audio Podcast:
An audio podcast of this article is available at: poweropt.com/podcasts/2007_02_14_TOL.mp3

Today, we will look at some bearish strategies involving the homebuilding and real estate market. By using the PowerOptions SmartSearchXL tool and specifying residential construction, we can find attractive trades in the industry.

The search returned information on the Toll Brothers Inc. (TOL) Stock. This company engages in the development, construction and sale of residential homes.

Using the guided research built in to the PowerOptions functionality, we can determine the following about this trade.

Analyst’s Opinions:
Not good… The analyst average is 2.5 out of 5. Also, analysts are predicting revenue to be down about 25% for the upcoming quarter.

Insider Trading:
A company officer, Bruce Toll, sold over $6.5 Million worth of stock on January 25th. Another company officer, Roger Hillas, sold $1.1 Million on the 5th of January.

Blogs:
The seeking Alpha blog reports, “Last week, Toll Brothers announced a 33% drop in orders and more land write-down trouble.” It goes on to say about the recent homebuilder rally, “Good weather may have contributed to December and January’s slight pickup, but a cold spell has likely ended that. Aggressive incentives and discounts along with land write downs are expected to take a big bite out of homebuilders 2007 bottom line, impacting recent stock price gains.”

Developing a strategy:
The strategies we will focus on are the bear-put debit spread and the bear-call credit spread. PowerOptions offers extensive information regarding trading strategies and lists the following as advantages of the strategies:

Bear-Put Debit Spread:
-This is a BEARISH strategies, the profit can only be realized when the stock price is below the break-even point.
-If the stock goes very low gains are limited to a maximum profit. -The maximum exposure is limited to the net debit.
-No stock is actually owned (uncovered position).
-In the money (ITM) puts offer high break-even points (more safety), but more limited profits.
-Out of the money puts offer larger profits, but have lower break-even points, which require a fall in the price of the stock to realize gains.

Bear-Call Credit Spread:
-This is a BEARISH strategy, the profit can only be realized when the stock price falls from current price to a number between the break-even point and net credit.
-If the stock goes very low gains are limited to the net credit.
-Risk can be controlled by how far out of the money the sold option is positioned. Further OTM spreads will yield less profit, but are safer and have a higher break-even point.
-In the face of a rise the investor can buy back the SOLD CALL and have unlimited profit from BOUGHT CALL.
-Highly leveraged because of the low margin requirement on the spread.
-No stock is actually owned. (Uncovered position).

Competitors:
Competitors for TOL include: Centex Corp. (CTX), DR Horton Inc. (DHI), Pulte Homes Inc. (PHM), and WCI Communities Inc. (WCI).
Potential Trades:
All of the following option trades have 32 days until expiration. Toll Brothers Inc. is currently trading at $32.11. These trades were discovered using the powerful suite of option search tools found at PowerOptions.

The first trade is a bear put debit spreads position. This trade offers 38.9% potential profit if the stock remains below $32.50. If the stock increases above the break-even price of $33.20, the investment begins to lose money. If the stock price goes above the higher strike price of $35.00, the entire investment is lost. The net cost of this trade, per 100 options, is $180.00.

The second trade is a bear-call credit spreads position. This trade offers 42.9% potential profit if the stock remains below $32.50. If the stock increases above the break-even price of $33.25, the investment begins to lose money. If the stock price goes above the higher strike price of $35.00, the entire investment is lost. The net cost of this trade, per 100 options, is $175.00.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions‘ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of PowerOptions‘ powerful stock options search tools.

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[tags]Jim Cramer, Bruce Toll, Roger Hillas, CTX, CENTEX Corp., DHI, D.R. Horton Inc., PHM, Pulte Corp., TOL, Toll Brothers Inc., WCI, WCI Communities Inc., bear put debit spreads, bear-call credit spreads, iron condor, poweroptions, stock option trading, stock options[/tags]