A New Options Opportunity in an Old Favorite

October 9, 2018

CSX has been good to us.

We've been bullish $CSX all year. And we had a successful options play this summer that recently came to a profitable conclusion. JC calls CSX "a beast!" I can't argue with that.

And low and behold, even as the overall market has hit a little bump in the road over the past week, $CSX just continues riding the rails, appearing to be in the final stages of completing a nice and tidy two-month base with eyes on a $91 price target and above.

With earnings on deck, the chairs are aligned for an opportunistic play to put elevated options volatility to work for us.

The combination of market-wide volatility rising a smidge recently, and CSX's October 16th earnings release date approaching has resulted in $CSX options pricing vol in the highest levels seen since the spring:

At the money straddles that expire the Friday after earnings are currently pricing in less than a $4.00 move. From here (CSX closed at $74.61 on Oct 9th), that would mean "the experts" are betting CSX will likely land somewhere between $70.50 and $78.50 immediately after earnings. Assuming CSX remains in a holding pattern between now and the event, I expect little will change on these targets.

And given our bullish stance in this name, what we've been seeing from a technical perspective, recent support at $72.50, and a rising 50-day moving average sitting around 73.60, I feel pretty comfortable that the path of least resistance for $CSX is higher.

This makes selling puts at elevated premiums a very attractive, high probability idea.

Here's the Play:

We're going to sell the November 23 (weekly) 70-strike puts for a $1.05 credit

This play is very simple (we love simple around here). If $CSX closes below $70, we'll exit the trade. Win or lose, we want out. The thesis is busted. No sense sitting around hoping and praying for a turnaround.

Assuming that scenario doesn't play out, then we'll look to cover these short puts around 50 cents or lower. Once we've captured at least 50% of our max available profit, we don't like to be greedy and hang around to capture that last nickel or dime. That's just asking for trouble. We'll take the easy profit and be on our way into new opportunities.

If $CSX trades higher coming out of earnings, I expect we'll cover these short puts shortly after the earnings event. If the stock trades sideways or slightly down, we'll still be ok, but we'll have to be a little more patient to wait for our exit price. I'll still like our odds nonetheless. That said, win or lose, I expect our hold time in this trade to be very short -- only about a week or two max.

A New Options Opportunity in an Old Favorite

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