Last week’s Libya induced sell-off hit the transport sector especially hard. While As option trading investors saw the S&P 500 Index drop 3.7% from peak to trough, the iShares Dow Jones Transportation Average Index Fund (NYSE: IYT) fell more than 7.5% and cracked below the pivotal 50 day moving average. The low volume, oversold bounce occurring over the past few trading sessions has now placed the IYT in a precarious position. The fundamental outlook doesn’t look much better. With crude oil nestled close to the century mark, we may see continued downward pressure on energy price sensitive transportation stocks. Given the vulnerability of the chart coupled with bearish fundamental factors, it may be high time to consider bearish option bets on this particular sector.

Typically traders can use the bevy of sector Exchange-Traded funds (ETF’s) when placing bets on an entire segment of the market. Of the few transport related ETF’s, the IYT seems to have generated the most traction with its daily trading volume north of 500,000 in recent months. Despite the daily volume accumulation on the underlying, the options on IYT have yet to provide sufficient trading liquidity. For example, the at-the-money IYT April 92 Put option had no trading volume in yesterday’s trading session and an open interest of two contracts. As a result of this anemic activity, the bid-ask spread stood at 50 cents — $2.80 Bid by $3.30 Ask — large enough to drive a truck through. While trading illiquid options can still produce profitable results, it certainly makes the process more difficult. In seeking better liquidity, we could turn to the transport stocks held within the IYT. Of the top five holdings, freight transportation services firm C.H. Robinson Worldwide (NASDAQ: CHRW), appears the most bearish and offers liquid options to boot.

Those with a continued bearish outlook on transports may consider purchasing the CHRW April 72.50 – 67.50 Bear Put Spread for $1.75. The spread consists of buying the CHRW April 72.50 Put while simultaneously selling the CHRW April 67.50 Put for a net debit in the range of $1.75. The sale of the 67.50 put option helps reduce both the cost and overall risk of purchasing the 72.50 put option.

 

C.H. Robinson Worldwide

Tyler Craig is the author of the Tylers Trading blog and owner of TC Trading. Craig is an educator and monthly contributor to Wealth Intelligence Magazine.

Follow Tyler Craig on Twitter @Tyler Trading.