Option Income (TOL)

in money •  3 months ago 

Interest rates and Mortgage rates are down.

These conditions should lead to a pick up in home sales.

One way to take advantage is trading for income on homebuilder Toll Brothers (TOL) by selling put options and then using covered calls after assignment.

When you sell a put, you get paid upfront for agreeing to buy a stock at a lower price (known as the strike price). If the stock drops below that price by the expiration date, you buy shares at the price you decided to buy the stock. If it holds above the strike price, you walk away with the cash.

Your risk is reduced because you earn cash upfront which lowers your cost basis. This strategy is best used on stocks you already want to own at a specific price. (Do not use just for speculation).

Toll Brothers is one of the top luxury homebuilders in the U.S. The firm operates in 22 states. Business has been good with the company generating a record $7.4 billion in sales, an increase of 18% over the last year. Toll Brothers earns a great profit margin of 10.4% and the company trades at a good price with an EV/EBITDA of just 8.9 (SP500 trades at 12.6).

The stock is using the 200 daily moving average (DMA) as support.


Trade Details:

Sell to open, the July 19, 2019, $35 puts on Toll Brothers for $1 using a limit order. You will earn 2.9% payment upfront for agreeing to buy shares at a discount to yesterdays closing price.

At expiration if shares are above $35: put sellers will keep the $1 for a 23.2% annualized return.

At expiration if shares are below$35: put sellers will buy shares at a 4.5% discount to yesterdays closing price. Once you own the shares you can turn around and sell covered calls for more income.

For protection use a stop loss at $31.50, shares will have broken its recent uptrend. It is best to take the loss and protect capital for future trades.

Sell puts today and earn a quick cash payout.

Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.

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