Shares of residential construction company Toll Brothers Inc (TOL) have given up all of last year’s gains, and are even down 15 percent over the past year. One trader sees further downside ahead.
That’s based on the January 2023 $30 put. With 193 days until expiration, 11,084 contracts traded compared to a prior open interest of 301, for a 38-fold rise in volume on the trade. The buyer of the puts paid $1.03 to bet on prices sinking lower.
Shares recently traded for just over $47, so they would need to shed $17, or drop by over one third for the option to move in-the-money. With a 52-week low of $40, shares would need to break to a new low.
Operationally, the company is coming off a strong year, with earnings up nearly 73 percent. However, rising interest rates and cooling home sales could just be in their early stages, which will also slow down new housing construction.
Action to take: Shares do look attractive at under 5 times forward earnings. But with a major earnings slowdown likely in the coming months, investors can likely get a far lower price for shares, possibly in the low $30 range before a potential bottom is hit.
For traders, the put options are an inexpensive bet on today’s tightening economic conditions, particularly with housing. The options could deliver mid-to-high double-digit gains in the months ahead.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.