Option Income (TOL)

in hive-167922 •  3 months ago 

Boring Investing Can Really Pay Off

Many investors are more like gamblers attracted to high flying stocks making big moves and trying to bet on the direction the stock will take next.

Some of the best opportunities in the market are where no one is paying attention. With option selling we can take advantage of boring stocks going no where with very attractive annual returns.

Selling puts is easy to understand, it is merely agreeing to buy shares of stock at a certain price within a certain time. For this obligation put sellers are paid upfront called a premium. (This is where the attractive returns exist even as the stock itself goes no where.)

Today, luxury homebuilder Toll Brothers (TOL) is a perfect example. The company is worth $5 billion and operates in 23 states. Business has been good with sales of $7.2 billion over the last 12 months (a 40% increase in three years). Earnings have done better up 91% in three years to $4.27 per share.

Shares are reasonably priced with an EV/EBITDA of just 11.1 (21% discount to S&P 500 Index).

The chart below shows TOL has been range bound recently in the $40 area.

Trade details:

Take advantage of the range buy selling a put option and collecting your return upfront.

Sell to open, the February 21, $39 puts on Toll Brothers for $0.80 using good till cancel limit order. This is a 2.1% payout on your purchase obligation for agreeing to buy shares at a 3.4% discount.

At expiration is shares are above $39: put sellers will keep the $0.80 for a 16.6% annualized return.

At expiration is shares are below $39: put sellers will buy shares at a 5.4% discount to yesterday's closing price (including the payout). Once you own shares you can continue to earn premium income by selling covered calls.

For protection use a stop loss at $34.50.

Start collecting cash today on this boring trade.

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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