Friday, February 26, 2010

Toll Brothes (TOL) - Vol Seller in June

TOL is trading 18.68. The LIVEVOL™ Pro Summary is below.

The company has traded over 19,000 options today in the first hour on total daily average option volume of 6,422. The largest trade was a Jun 18 straddle sale 9,258x (18,516 contracts) @ 3.10. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The straddle is profitable at Jun expo if TOL stock is between 14.90 and 21.10. If not held to expo, the straddle wins to vol decreases (or vol stays the same, stocks stays the same and time passes - i.e. time decay).

The bottom portion of the Charts Tab snapshot (click to enlarge) illustrates the IV90™ (hypothetical 90 day option) vs. HV90™ (90 day actual vol of the stock) over 6 months. Purple is HV, green is IV. The top portion illustrates the stock movement over 6 months. The yellow shaded area charts the vol difference.

Note that IV90™ is below the HV90™ and is relatively low to the last six months. i.e. this looks like a cheap sale rather than an expensive one. Note also TOL had earnings a couple of days ago - so a decent projection is that the Jun options include an earnings cycle (vol event).

Finally the Skew Tab snapshot is included (click to enlarge). Note that Jun options are more expensive (higher vol) than the front 2 months (which makes sense if you buy into the earnings projection). You can also see the Options Tab snap embedded in the bottom reflecting the actual monthly vols and that June is above the front two months.

Skew Legend:
Red - Front month
Yellow - Second month
Green - Third month
Blue - Fourth month

My initial reaction to this trade is sort of luke warm. Seems like the vol isn't a great sale - or at least not an obvious sale. It looks like the downside is safe(ish) given the stock movement over the last 6 months but the upside could be vulnerable (of course the past doesn't necessarily mean anything - but it's all we have). A couple saving graces in my mind for this trade:

(1) The coming months are historically slowish - so a simple time decay play could be smart (which this is).
(2) Basically every stock looked like this about a year ago - i.e. every IV looked like a purchases (low) relative to HV but in fact the opposite was true. It turned out everything was a sale. Then again, a year ago VIX was 50.

This is a bet of less stock movement moving forward than there was in the past 6 months ---> lower vol. Max Gain = 9,258 x 100 x $3.10 = ~ $2.9 million.

This is trade analysis, not a recommendation.

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