Short CSX Corporation (CSX) Stock and the Ticket Is Free

Advertisement

The transportation sector stocks have been on fire of late. The iShares Dow Jones Transport. Avg. (ETF) (NYSEARCA:IYT) rallied over 20% in the past 12 months and is now at all-time highs. This came quickly after a tough period for markets where experts were fearing a market bloodbath. This is a bullish equity environment and the transports are leading.

Short CSX Corporation (CSX) Stock and the Ticket Is Free

As impressive as the sector is, CSX Corporation (NASDAQ:CSX) is even more so. The stock is up 90% in 12 months. It rose form under $30 to $54. A bulk of the move came on the heels of its January earnings report when CSX stock surged 30% and never looked back.

Fundamentally, CSX stock is not cheap. It’s price-earnings ratio is bloated relative to its competitors. I am always leery about chasing runaway stocks who are overpriced in their sectors. So today’s trade will bet against the short-term price action, but without putting any of my money in immediate risk.

I am not a perma-bear on stocks; I just don’t like CSX at these levels. If I were to allocate bullish risk, I’d rather opt for cheaper valuation. I can even own a premier tech stock like Apple Inc. (NASDAQ:AAPL) or Microsoft Corporation (NASDAQ:MSFT) for much better valuations and healthier balance sheets.

Nothing is likely to go up for ever without a breather. CSX has been rallying too long without any rest. I also worry about expectations. Often enough, if Wall Street establishes lofty expectations, the disappointments cause sharp selloffs. CSX stock, after a 90%-plus rally in 12 months, is vulnerable to having a few people not getting what they want. To the point, most analysts also are on record with “buy” or “outperform” ratings.


Click to Enlarge 
Technically speaking, and after the January spike, CSX stock established a plateau around the $46 level from which it sprang to higher highs. As a result, the stock now has two potential support levels between current price and that $46 base.

Both the $52 and $50 per share levels should present some support in case we see dips in the underlying. I have to consider those when placing my CSX option bets.

Before you call for my head because I dared short a stock, you should know that I’m not arguing against the company’s prospects … I’m merely betting against the short-term price action.

In fact, I will be using the company fundamentals to finance my trade. I will be short CSX stock for free, discounting the risk of owning it 20% lower than today.

The Bearish Bet: Buy CSX stock 11 Aug $54/$53 debit put spread for 30 cents to open. If price falls through my spread, I stand to more than double my money.

Earlier, I said that my trade will be free. To do this, I sell downside risk, which is a bullish trade that completely finances my bearish bet.

The Bullish Bank: Sell CSX Nov $43 put and collect 55 cents to open. Here I have a 90% theoretical chance of success in keeping my entire premium for maximum gains. If price falls too far (and below my put), then I have to own the shares. I would then accrue losses below $42.45. But keep in mind that I will be profiting from the fall, so the overall risk is minimal as long as the equity markets in general don’t crash soon.

Taking both trades results in a net credit. Meaning even if nothing happens, I already have profits. Furthermore, as long as price stays above $43 through November, any premium I capture from selling my August puts would results in incremental profits. Ideally, I want CSX to fall through my spread but stop above $43.

Investing is risky, so I never bet more than I am willing to lose. I don’t sell naked puts unless I want to own the shares.

Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/short-csx-corporation-csx-stock-and-the-ticket-is-free/.

©2024 InvestorPlace Media, LLC