By Jud Pyle, CFA, chief investment strategist for the Options News Network
shares are down more than 6% so far on the day, despite positive notes out from FBR Capital ahead of the bell this morning. Options action during today's session suggests at least one investor anticipates further downside during the short term.
NSC shares have dropped $2.51 to $54.29 so far on the day following news that FBR Capital raised the earnings per share estimates and price target on the rail company (price target was raised to $70 from $66). The company has not announced its next earnings release date, but the market expects the report around July 27.
By 1:30 p.m. EST, more than 5,200 front-month June 55 puts had changed hands versus current open interest of 1,700 contracts, indicating investors most like traded these options to open. The near-the-money June 55 puts crossed for $1.65 per contract, which was the ask price when the options crossed the tape.
The investors who bought these puts are calling for the stock to drop more than 1% during the next couple weeks and willing to risk $1.65 per contract to bet that the shares will be trading lower than $53.35 at June options expiration.
It is possible that investors tied this bearish options bet to a stock position, which would turn this trade into a volatility play. Additionally, the investor could be buying these puts for downside protection, and could choose to sell back the options if the price of the puts rises with or without a major move in the stock.
Implied volatility of the June 55 puts is 38%, which is roughly in line with the stock's 30-day historical volatility.
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."