Retail & Railroads: Options Recap

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Here’s a breakdown of some big options spreads from Tuesday. Both reflected continued optimism about the economy.

First, a put ratio spread in the SPDR S&P Retail ETF (XRT):

  • A block of 50,000 27-July 48 puts was bought for $0.36.
  • Some 100,000 27-July 47 puts were sold at the same time for $0.18.
  • It was the largest transaction in the entire options on Tuesday.

Selling twice as many contracts generated extra income and essentially eliminated the transaction’s upfront cost. They now stand to collect $5 million if XRT closes at $47 on expiration. (That’s $1 per share on 50,000 contracts.) See our Knowledge Center for more on spreads and selling puts.

Gains erode below $47 because they’ll be short puts, and turn to losses under $46. The fact they accepted that risk suggests they don’t see much risk of a sharp decline. XRT fell 0.72 percent to $49.61.

It’s also possible that they have a position in XRT and are using the spread to hedge against a modest drop and are willing buyers of more below $47. Given the fund’s concentration in consumer companies, the activity seems to reflect confidence in U.S. growth.

Secondly, a bullish call spread was apparently looking for a strong earnings report from another economically sensitive stock: railroad operator Norfolk Southern (NSC):

  • A block of 5,000 27-July 162.50 calls was bought for $1.95.
  • A matching number of 27-July 172.50 calls was sold for $0.10.

The strategy cost $1.85 to implement and will expand to $10 if NSC closes at $172.50 or higher on expiration. That would be a potential return of 441 percent. Should the stock remain below $162.50 the whole position will become worthless.

NSC ended the session up 1 percent to a new all-time high of $158.71. The company, like rivals CSX (CSX) and Union Pacific (UNP), beat estimates the last time it reported earnings in April. Its next set of numbers is due on July 25, two days before Tuesday’s calls expire. That suggests the trader is looking for bullish news.

The transaction pushed total option volume in NSC to the highest total of the year, with calls outnumbering puts by a bullish 22-to-1 ratio.

Did you see our special report on the surge in rail traffic? Click here for access!

 

Norfolk Southern (NSC) with options volume, 50-day moving average.
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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.