Dear Big Dog on the block,
Sorry for not getting back to you sooner. I looked at the entire spectrum of puts, the implied volatilities, and other pertinent data. One thing I can say is that I would not advise on buying short dated puts, such as those for February or March. In so doing, one is betting on the price swing happening in a short period of time, something very difficult to predict. The next series available is June, and that series and others beyond it, September, January 2006, and January 2007. They have similar implied volatilities, meaning, the time premium in the options is proportional with the difference really being time.
In buying a put, you need to have an expectation of what the price of the underlying security is going to be at or before expiration. If you can picture your ending price level, then choosing the most profitable put or call is a secondary decision. Also, what kind of capital to commit is a consideration, as puts that are in-the-money and at-the-money are going to cost you more. Since no one has a crystal ball, it is best to err on the side of caution and determine how much leverage you are willing to give up in order to buy protection in the form of time.
There are several option strategies that one can pursue, and your question might imply that a straight put purchase is in the cards. I am not sure that is what you are looking at, but seasonally, the home building stocks weaken in the late March and April time frames, with another seasonal sell off in the June and July period. Having run up so much, I think that this contention may be out of order this year -- who knows?
I am trading puts around -- the stock goes up I buy, it retraces a bit, I sell. I could just as well be shorting and covering, or buying and selling. The options interest me here because of the tear the stock has been making on the chart. Something that I think everyone agrees is unsustainable indefinitely, but the trick here is in trying to rationalize a decision to step in because you believe a top is near. Many advocate waiting for the stock to turn, but a big move could be lost if you choose to do so. I look at how far stretched the stock is relative to its RSI, moving averages, bollinger band widths, etc.
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I personally own June 80 puts purchased on Friday at lunch time. They have a 0.4 delta and will be traded. They are just out of the money and if the stock drops significantly, they will provide plenty of leverage as the delta doubles in a couple of points. Again, you need to have a price objective for your exit within a specific amount of time. I have all of the information handy -- option data and fundamental data and I could give it all to you at the risk of filling another 10 pages, but you need to look at that chart, monthly, weekly, and daily, and rationalize where this puppy is going to end up by a certain date. Once you get that established and how it is going to get there, choosing an option strategy is a much easier thing to do.
You can short the stock by selling a naked call to open. In addition to being short, you also reap time premium on the call as it decays. If you are bullish, you can write a put as well.
I am sorry I did not give you a specific answer, but this is the most honest way to present you with my best information given the little I know about your interest and tolerance for fluctuations in the price of TOL. Let me know some specifics and I can share with you some of the technical data regarding the options.
Best regards, |
