By Jud Pyle, CFA, chief investment strategist for the Options News Network

Shares of the railroad companies are down more than the market so far today. Norfolk Southern ( NSC) has fallen more than 8%, Kansas City Southern ( KSU) more than 9% and Union Pacific ( UNP) more than 9% compared to the S&P 500, which was down just 3.6 % in the first five hours of trading. With the slides in the stocks, we are seeing option activity that suggests more downside slides could be in the offing.

Looking at Norfolk, we see that in the first five hours of trading today, 10,000 of the January 20 puts had traded. Five thousand of the January 35 puts had also traded. The volume all traded together as a put one by two. The investor sold the 35 puts for 11.1 each, and bought twice as many of the 20 strike for $3 each.

Looking next at Union Pacific, we find that in the August options, an investor bought the August 25 puts more than 7,000 times and sold the August 35 calls more than 7,000 times. At a price of roughly 2.20 in the puts and 5.20 in the calls, the investor collected $3 to do the trade, so will be profitable at expiration if the stock is below $32.

What makes these trades notable is that all of them will be the most profitable for the investor if the shares continue to slide. The bearish case for the railroad companies and the Dow Jones Transportation index in general, has been that there is nothing to ship. But in addition to that problem, now over the last few months there has been action from Washington that could harm the railroads.

The only thing that could save the rails in 2009 is pricing power, which they've been able to enact over the past few years, partially due to lagged fuel surcharges, also due to decreased government regulation and rails claiming better efficiency and service.

However, a few weeks ago, the Surface Transportation Board ruled against Burlington Northern ( BNI) in a captive shipper rate case and it was a negative on the entire space. This morning, the Railroad Antitrust Enforcement Act of 2009 passed the Senate Judiciary committee by a vote of 14-0. No guarantee that this bill passes, but if it does, it could have the effect of making it easier for shippers to sue railroads under antitrust law in the future, not good for pricing.

Many market participants have believed in the past that the Dow Transportation Index is the leading indicator for the rest of the market. Given the 6% slide in the index today and these trades betting on still more declines, which could be a less than positive sign for this already ailing market.

Jud Pyle is the chief investment strategist for Options News Network 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."