CSX Corp (CSX) will report after the close tonight. The options market is implying about a $3.30 move in either direction or about 5%, which is slightly rich to the 4.5% average one day move over the last four quarters, and above the 3.6% average over the past ten years.
While CSX is not exactly the sort of stock that would draw our attention from an options trading standpoint, the commentary of a $55 billion market cap rail company with $12 billion of sales (all in the U.S.) in this economic environment with the backdrop of a global trade war and slowing growth in the U.S. might prove to be very useful for investors who have been confused by the volatility in our markets.
Shares of CSX are down about 15% from its all-time highs back in August. The stock’s 10% bounce since te day after Christmas, it is now at an interesting technical level, where it gapped nearly 8% higher after earnings in July, pulled back to and found support in late October, broke below in December and dropped precipitously in ten days and has since consolidated at after the recent bounce:
Taking a longer-term view, the break-down last month was below the uptrend from its 2016 lows, and the stock is now facing that trend, but this time viewed as technical resistance:
Shares of CSX trade at about a market multiple of 15x. but 2019 guidance could be important as consensus estimates call for 11% eps growth on 3% sales growth, both a major downshift from 2018’s expected 66% eps growth on 7% sales growth.
So what’s the trade?
If I thought the company would print a beat and a raise then the stock could easily be up in line with the 5% implied move. In that case,weekly call spreads look attractive, for instance:
Bullish Trade Idea: CSX ($65) Buy Jan 65 / 69 call spread for 1.30
-Buy to open 1 Jan 65 call for 1.65
-Sell to open 1 Jan 69 call at 35 cents
Break-even on Jan expiration (Friday):
Profits of up to 2.70 between 66.30 and 69 with max gain of 2.70 at 69 or higher
Losses of up to 1.30 between 65 and 66.30 with max loss of 1.30 at 65 or lower.
Rationale: This trade idea risks 2% of the stock price, with the possible profit potential of 4.2% if the stock is up in line with the implied move post-earnings.
Obviously, a trade idea like this warrants our usual disclosure for long premium directional trades into events, you need to get a lot of things right to just break-even, direction, the magnitude of the move and of course timing.
Or if I were inclined to play for a miss and guide down I might consider a longer duration trade in Feb expiration playing for a re-test of the Dec lows over the coming weeks, for instance:
Bearish Trade Idea: CSX ($65) Buy Feb 65 / 57.50 put spread for 1.70
-Buy to open 1 Feb 65 put for 2.15
-Sell to open 1 Feb 57.50 put at 45 cents
Break-even on Feb expiration:
Profits of up to 5.80 between 63.30 and 57.50 with max gain of 5.80 at 57.50 or lower
Losses of up to 1.70 between 63.30 and 65 with max loss of 1.70 above 65
Rationale: This trade allows for some time for this idea to play out, risks 2.6% of the stock price to possibly make up to 9% if the stock is down 9% in the next month. Risks 1 to possibly make up to 3.4x the premium at risk…
Disclaimer… see above on long premium trades into events.