As I write this Toll Brothers (TOL) is trading up 0.73 to 31.20. The company reported earnings this morning. I scrambled to find a trade that called the direction of this earnings reaction from yesterday and didn’t have to look to hard. With just under half an hour to the close and TOL trading at 30.47 someone came in and sold several hundred TOL Dec 9th 29.50 Puts for 0.50 and purchased the TOL Dec 9th 27.00 Puts for 0.15 netting a credit of 0.35 per spread. The payoff as of the close on Friday the 9th appears below.
This trade just needed to get the direction right and it looks good for the moment. The worst-case scenario would be TOL at 27.00 or lower, which would involve a drop of over 10% from yesterday’s close. I checked the 3-year history on TOL’s earnings reaction and the worst drop was just under 8%.