Leveraging Toll Brothers' Pre-Earnings Volatility for Monthly Income with Covered Calls

The upcoming earnings report for Toll Brothers (TOL) on May 20, 2025, presents a unique opportunity to capitalize on volatility through a covered call strategy. With the stock trading at $105.60 and analysts forecasting a 29.81% upside to the $139.23 consensus price target, investors can deploy a tactical options approach to generate $500/month in premium income while mitigating downside risk.

The Earnings Catalyst: A Key Inflection Point

TOL’s Q2 2025 earnings, scheduled for May 20, will test investor sentiment amid mixed signals. While consensus estimates project a 15.4% year-over-year decline in EPS to $2.86, the $7.47 billion backlog and 416 active selling communities (up from 386 in 2024) signal resilience in demand. Historically, TOL’s stock has seen sharp swings post-earnings—such as a 5.87% drop in 2024 after a miss. This volatility creates an ideal environment for options traders to monetize time decay and earnings uncertainty.

The Covered Call Play: Capturing Premium Income

A covered call strategy involves holding TOL stock while selling out-of-the-money (OTM) call options to collect premiums. Given TOL’s current price of $105.60, here’s how to structure the trade:

1. Strike Price Selection: Target OTM strikes $109.63 or $112.00, which are 3.8% and 6.0% above the current price, respectively. These strikes are unlikely to be hit in the near term, especially with the bearish short-term forecast.
2. Expiration Timing: Use May or June expirations to align with the earnings announcement. For example, selling the TOL June $109.63 call could yield a $2.50–$3.00 premium per share, depending on implied volatility.
3. Position Sizing: To generate $500/month, an investor would need to sell ~167 contracts (16,700 shares total). This requires a significant capital commitment, but the strategy’s breakeven point is lowered by the premium collected.

Risk Mitigation: Dividends, Backlog, and Analyst Optimism

While short-term technicals suggest a drop to $101.47 by June, three factors provide a floor:

1. Dividend Support: TOL’s 0.93% yield (based on a $1.00 annual dividend) offers steady income, even if the stock stagnates. The recent dividend hike to $0.25/quarter underscores financial stability.
2. Backlog Strength: Despite a 4.7% YoY drop in backlog units, the $7.47B backlog value remains robust, ensuring steady revenue visibility.
3. Analyst Confidence: The Outperform consensus and $139.23 price target reflect long-term optimism, even as short-term metrics like the Zacks #4 “Sell” rank focus on near-term headwinds.

The Upside Case: Post-Earnings Recovery

Should TOL beat or meet estimates—particularly in home sales revenue or average delivered price—the stock could rally toward its $131.41 2025 annual high. Selling OTM calls allows participation in this upside until the strike price, while the premium acts as a cushion against declines.

Act Now: Time Decay and Earnings Volatility in Your Favor

With 3 days until earnings, implied volatility is likely inflated, boosting premiums. Selling OTM calls now captures this volatility premium, which will decay rapidly post-earnings. Even if TOL drops to the projected $101.47 support, the premium offsets losses, preserving capital while maintaining exposure to recovery potential.

Final Call to Action

TOL’s upcoming earnings create a rare convergence of volatility and valuation upside. By deploying a covered call strategy with OTM strikes, investors can secure $500/month in premium income while leveraging the company’s stable backlog and analyst-driven upside. The time to act is now—before volatility contracts post-earnings.

Disclaimer: Options trading involves risk, including the potential to lose the entire premium paid. Always assess personal risk tolerance and consult a financial advisor.