CSX Corp. (NYSE: CSX) is in the rail and container-shipping business. We have a favorable outlook for shipping in general, but rail is our favorite. CSX has had a very good run and earnings in the stock are due April 13, very close to April expiration on the 15th. So if you trade in April, options trading investors have very little time to be right on the trade.
With the past movement in the stock after earnings of close to 3.7% and the run in the stock we favor a strangle purchase. With the stock trading at $80 dollars, we want to buy the CSX April 75 Put and buy the CSX 85 Call. We are looking for a big move in the stock after earnings. The options market is expecting a move of around 4.5%, and our strategy is a winner if the stock moves a little more than 6%. The stock has had a big run, rail business had been decent, the economy is picking up, but the guidance of shipping companies, especially rail will be very important to overall market sentiment. If the company guides well, or badly we could see a big move.
We recommend a CSX Call/Put Strangle with the stock at $79.80.
BUY/STRIKE/MONTH/PRICE – 1 April 15, 2011 85 Call @ $.30
BUY/STRIKE/MONTH/PRICE – 1 April 15, 2011 75 Put @ $ .50
NET COST = $0.80
STOCK COST BASIS – If stock is already owned, at what price?
BREAKEVEN – 85Call +.80 = $85.80;
– 75Put -.80 =$74.20
MAX LOSS – The .80 cent premium paid
MAX PROFIT – If CSX rises, the strangle has unlimited upside potential – minus the 80 cent premium paid.
– If CSX falls, the strangle has unlimited profit if stock were to fall to 0 – minus the 80 cents paid for the premium.
Stutland Equities is a premier futures and options trading company on the Chicago Board Options Exchange. Founded in 2005 and headquartered in Chicago, Stutland Equities specializes in volatility arbitrage across multiple asset classes.
