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December 2, 2011  Fri 12:19 PM CT

TOL: SEE CHART GET CHAIN FIND STRATEGIES
Ahead of its earnings report next week, one investor is betting that Toll Brothers will hold its recent gains.

optionMONSTER's monitoring systems detected the purchase of 11,000 December 18 calls for an average premium of about $2.525 and the sale of an equal number of December 20 calls for $0.85. Volume was below open interest in the 18s but not the 20s, which suggests that an existing short position was rolled to the higher strike.

The transaction was probably the work of an investor who owns shares in the homebuilder and is using the options as part of a covered call strategy, which generates income while limiting potential upside. By adjusting the position today, the trader obtained the right to collect an additional $2 of upside on the stock. (See our Education section)

In return, they paid about $1.675. The move is noteworthy because it reflects a belief that TOL will remain above $19.675 through expiration. Otherwise, they would have been better off staying short the December 18 calls.

TOL is up 0.64 percent to $20.39 in afternoon trading and 42 percent from the start of October. The next scheduled event that could potentially move the shares is the release of fourth-quarter earnings before the bell on Tuesday. It issued a strong preliminary report on Nov. 8. (See researchLAB for more)

Overall option volume in the name is 11 times greater than average so far today, with calls accounting for 99 percent of the activity.
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Education & Strategy

Sweet Spot Exceptions

As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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