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2 Ways to Play Resurgent Transports

Go with a call spread on IYT or try calls on UPS


Amid an otherwise lackluster midweek trading session on Wall Street, transport stocks soared. By the end of Wednesday trading, the Dow Jones Transportation Index climbed 1.63%, besting the performance every other major market index.

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Talk of transport stocks has been on the rise ever since the popular Dow Jones Transportation Index blasted to new all-time highs back in January (red line in chart). Dow Theorists have been fixated on the Dow Jones Industrial Average to see if it too would ascend to new heights by breaching its 2007 highs.

Obviously, the DJIA did follow suit by finally climbing above the magic 14,198 level last week. And with that breakout, a significant Dow Theory buy signal was generated.

Wednesday’s rally was led by JB Hunt Transport Services (NASDAQ:JBHT), which cruised 6.2% on the day to a new all-time high. Alaska Air Group (NYSE:ALK) followed in kind, rising 4.3% to claim second place among all the transportation stocks.

Traders looking to play continued strength in the industry have a couple choices.

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If you want broad-based exposure to the entire basket — truckers, airliners, rails and shippers — consider playing the iShares Dow Jones Transportation Average Index Fund (NYSE:IYT). Aside from the stellar uptrend, the IYT also has been boasting some serious relative strength. The rise in the comparative relative strength study since mid-September has been relentless.

You could purchase the April 110-114 bull call spread by buying the 110 call and selling the 114 call for a net debit around $1.85. The risk is limited to the initial $1.85 paid and will be incurred if IYT sits below $110 at expiration. The max reward is limited to the distance between strikes minus the net debit, or $2.15, and will be captured if IYT can rise above $114 by expiration.

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If you’re looking for an individual transport stock to play, United Parcel Service (NYSE:UPS) staged a breakout Wednesday, sparking what could be another upswing. Its options are pretty cheap right now, so purchasing the April 85 call for $1.38 would offer a low-cost avenue for participating in any additional upside in the coming month. The risk is limited to the initial $1.38 paid, while the reward is unlimited.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

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