Talk about building on gains.
Shares of home construction giant Toll Brothers rallied 5% to a new 52-week high Monday, adding to a double-digit climb in the past week, after Bank of America raised its price target on the stock.
And options traders are taking advantage of the move, said Dan Nathan, co-founder and editor of RiskReversal.com.
“Usually you don’t Look this sort of activity on a broker raising price targets on a group,” he said Monday on CNBC’s “Options Action,” noting that total options volume in Toll Brothers’ stock was 15 times the daily average.
“Most of that was in calls, and today, traders were buying calls right out of the gate when the stock was [$]39,” Nathan said. Toll Brothers shares rallied to above the $40 level by the end of Monday’s session.
Earlier Monday, however, buyers flocked to the October $41 calls, Nathan said. The biggest buyer of those calls purchased 8,000 of them for 43 cents, presumably “looking to play for just some higher highs,” he said.
When the shares were trading at $39, that trade represented a bet that the stock could climb as much as 5% by the October-end expiration date.
And, considering Toll Brothers’ trading history, higher highs aren’t out of the question, Nathan said.
“This stock and the group in general were down a whole heck of a lot,” he said, pointing to a two-year chart of Toll Brothers.
“That … [$]40-ish level was kind of near-term technical resistance,” Nathan said. “But … the stock was trading as high as [$]50 at some point in 2018. It’s a cheap stock, trading at about 10 times [next year’s earnings estimates]. We know that obviously these aren’t huge growers. They’re mid-to-low-single-digits earnings and sales. But if you think that there’s kind of some supply-demand dynamics that were just shaken up by this rate move, that’s why these names are moving.”
Moreover, as Toll Brothers shares have traded sideways over the past several months, options have gotten less expensive, which may be part of the reason for this explosion in the options market, Nathan said.
“The price of options in Toll Brothers got really cheap into this consolidation the stock had been in over the last few months, so making long premium directional bets in options was a great way to do it and I think that’s what traders were thinking today,” he said.
Toll Brothers shares were down modestly in Tuesday trading.