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Options trader bets Toll Brothers can see a big rally on earnings

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Options trader bets on one homebuilding name to build a rally

Toll Brothers heads into Wednesday afternoon's earnings report desperate to share good news. The stock is down 20% on the year, lagging behind names in the space such as PulteGroup and D.R. Horton, but it did get bailed out by a piece of good news on Tuesday.

April's new home sales numbers crushed expectations, rising a little less than 1% despite experts predicting a 22% decline. That number boosted Toll Brothers to a 4% gain in Tuesday's session, and the stock is on track for another gain Wednesday. 

Earnings could be the catalyst for an even bigger leg higher in the name, and as Optimize Advisors President Michael Khouw discussed Tuesday on "Fast Money," that's exactly what one options trader is hoping for. 

"Some of the activity we were seeing [Tuesday] was optimistic, looking for some upside," said Khouw. "One of the trades I identified that I think was a good example of this was the September 33-calls. The buyer was paying about $3 for those."

That trade breaks even at an underlying stock price of $36, or 20% higher than where Toll Brothers closed Tuesday's session. That may seem like a huge move at face value, but as Khouw would point out, Toll Brothers has a habit of making big post-earnings moves.

"Right now [the options market] is implying an 8.5% move, after [Toll Brothers reports] earnings. That's larger than the 6.4% or so that they have averaged over the last eight quarters," said Khouw. 

Toll Brothers was trading about 5% higher midday Wednesday.

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