[Options] Putting the Offense on the Field

Sean McLaughlin
January 11, 2023

With the NFL Playoffs getting underway this weekend (Go Bills!), it's time we put the offense on the field!

I was kicking around a bullish idea in a consumer staples name during our Analyst meeting today. The chart looks great. The setup is good. We can position for a nice potential reward versus the risk we'd incur to put the trade on. Everyone agreed that its probably a good trade.

But... is it aggressive enough?

Answer: No, it's not.

The thinking that emerged from our chat was that risk is back on in the stock market; therefore, we need to get into the most reasonably aggressive names we can. And one of the areas where risk is most definitely "on" is in the homebuilders sector.

If all we did was watch the evening news or listen to the inflation and interest rate scaremongers, we'd reasonably conclude that a long-term and painful bear market for real estate and housing in particular is a slam dunk. No contest.

If a severe real estate bear market was in the cards, would we be seeing homebuilders ripping of their recent lows the way we have over the past couple of months?

Check out this chart of Toll Brothers $TOL:

Does this look like a chart that is pricing in the end of the world?

Somebody knows something here, and I want to position with the Somebodies.

Here's the Play:

I like buying $TOL June 65 calls for approximately $2.10 per contract. Our risk is limited to this premium we pay today (we can't lose any more than what we pay for these calls), and the cost of these calls is relatively cheap, as implied volatility in $TOL options is near yearly lows.

The bet we're making is that $TOL will make a run at least up to its prior highs set in late 2021. If it does so, our calls will see at least a 5x return on our purchase price -- if not more. Those kinds of gains will definitely "raise the roof!" Or at the very least, help bolster the funds we have available for a downpayment on a new Toll Brothers home.

Of course, we'll take some risk capital out along the way if this stock begins to rise like we think it will. If our calls double in value from here, we'll sell half of our position to remove our original risk capital. Then we'll put our feet up and enjoy the show into June, knowing that the worst we can do is breakeven on this campaign.

Meanwhile, any $TOL close below $50 invalidates our trade thesis and I'll close out the trade for whatever I can salvage near the open on the next trading day. I don't argue with Price when it tells me I'm wrong.

If you have any questions on this trade, please send them here.

ASO subscribers who missed last week’s live video Jam Session where we reviewed activity in our options portfolio from the past week can catch it here.

~ @chicagosean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7991.

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