The short-term reactions in stocks to earnings reports are arbitrary. We never really know what investors want to hear or what the company will deliver. Last night, CSX Corporation (NASDAQ:CSX) told a great story and today investors are rewarding the stock.
They crushed estimates on financial metrics and more importantly gave good guidance going forward of better things to come. The relatively new CEO Jim Foote promised a leaner, meaner machine and he delivered. They are creating a fortress.
Investors were worried for a while after Mr. Harrison died, but his replacement has stepped up. Mr. Foote is carrying on the plans with confidence. And therein lies my optimism.
My overall macroeconomic thesis is still bullish through 2018. We have tax advantages and robust spending periods, so there is no fundamental reason to sell this market to new lows. And in a rising market, CSX stock should also do well.
I am not one to chase upside hopium blindly, especially not at all-time-highs. So today, I will generate income from CSX options so I can make money, even if the stock stalls.
Fundamentally, CSX is not cheap but it ranks high in profitability so it’s not bloated either. Wall Street experts are less than enthusiastic on the stock, meaning there is room for surprise upgrades. Furthermore, the stock is trading closer to the lower end of their price ranges then the high ends.
Technically, there are also opportunities above. If CSX sets a new high, it should overshoot by up to $5-per-share. Although this is a technical possibility, I am more certain of downside support than upside hopium.
Below $52-per-share, investors have consolidated CSX stock very well. I believe that this will hold through 2018, so I will use it to generate income with no out-of-pocket expense. Should the price go against my trade, I will own shares of CSX at a heavy discount from the current price. And that would not be a financial disaster.
The Trade: Sell the CSX NOV $50 put and collect $1.40-per-contract to open. Here I have an 85% theoretical chances that the price will stay above my level. Else, I will accrue losses below $48.60.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the CSX NOV $50/$45 credit put spread, which would deliver over 13% in yield but with much smaller risk. Both set ups have about the same odds of success and neither require a rally to win.
There are no guarantees when investing in stocks, so I never risk more than I can afford to lose.
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 as @racernic on twitter and stocktwits.