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Leverage is key to call strategy in Toll

David Russell (david.russell@optionmonster.com)

Toll Brothers doesn't have to move much for one big investor to make money.

optionMONSTER's Heat Seeker monitoring system detected the purchase of 10,000 July 33 calls for $1.15 and the sale of 20,000 July 36 calls for $0.35 on Friday. The volume was more than 8 times the previous open interest at each strike, indicating that new positions were initiated.

The trade cost just $0.45 to implement and will generate a maximum profit of 567 percent if the homebuilder closes at $36 on expiration in a month. Gains will erode above that level and turn to losses with the stock above $39.

Known as a ratio spread because twice as many contracts were sold as the number bought, the strategy uses the additional income to lower the cost basis of the trade while enhancing leverage. It's designed to target a rally to a specific level and is often used by shareholders looking to repair a losing position in a stock.

For instance, if the trader is already down in the shares, the ratio helps him or her earn more on a rebound while programming an exit at a certain level. (See our Education section for more on how to manage trades more effectively with options.)

TOL ended Friday unchanged at $31.70. It almost tripled between October 2011 and September 2012 but has been moving in a range since.

Total option volume was 7 times greater than average in the name, with calls outnumbering puts by 8 to 1.

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