By Jud Pyle, CFA, chief investment strategist for the Options News Network
Ahead of the opening bell today,
announced earnings of $1.08 per share, which beat estimates by four cents. Since then, the company's stock has rallied nearly 3% on the day to $65.50, but at least one investor is taking a later-term bearish position on the railroad name.
Around 10:47 a.m. EST, 6,200 contracts traded at the May 60 put strike, the May 65 put strike and the May 75 call strike. These options crossed the tape simultaneously as an investor bought the put spread and sold the calls. The investor bought the May 65 puts for $4.40 per contract and sold the 60-strike puts at $2.20 per contract, paying a net debit of $2.20 per spread. At the same time, the investor sold May 75 calls at 70 cents per contract (perhaps to help finance the purchase of the put spread while maintaining a bearish stance on UNP), making the entire combination trade cost $1.50 each.
By afternoon trading, more than 11,600 contracts had changed hands at each strike. The open interest at the May 60 puts is currently 2,200 contracts, while the March 65 puts are home to open interest of 1,500 contracts, indicating investors traded these options to open. The March 75 calls are home to current open interest of 32,000 contracts, which means the investor could have taken profits and closed a long call position.
Looking at the put spread specifically, if UNP shares drop below $60 at May options expiration, the investor will make a maximum profit of $2.80 (the difference between the lower and higher strike minus the premium paid). Investors will incur a maximum loss of $2.20 (the debit paid) if UNP shares soar higher than $62.80 (the breakeven on this trade).
Keep in mind we also saw bearish action in UNP last week, as an investor put on a
and bought the May 62.5-67.5 put spread and simultaneously sold the May 75 calls. Now that earnings are out of the way, the investor looks to be taking a bearish stance on the company and betting on roughly 7% of downside throughout the next four months.
Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.
Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."