Railroad Option Play So in the summer I mentioned a few option plays and made predictions that led into this time frame.
My predictions are pretty damn close and still have a little runway. Just to highlight, at the time the closing price was $153.52 and I predicted 165-170 by year end (166.55 at year end). I mentioned a longer time frame Put Option for March 15th at 170 that looked attactive because by the time that put expired I expected to be “above 170, maybe close to 180+”, obviously we are now over 170, and there is still over 5 weeks to go before that Put would have expired and 180 is in sight. And I also mentioned “I bet we see 175-180” after the dividend hike, and we are almost there. I did expect a “10+%” dividend hike and we only got 7ish%.
Semi-unfortunately, I did not make a move on this idea that was going to have a payout of $1700, as I did a few other things (bought 1500 shares of ARE @ 11.50 = $4560 gain as of close today + $1021 I received for the premium of the Put I used to do that) with that similar amount of margin use I proposed, initially, because the Put was excersized I did have use more money on the purchase, which would have been similar case had I had to buy CNR.
So anyway, I’m back today for something to look at going the other way, as I made an opposite move today. I sold a single Call option (because I only have 100 shares of CNR) with a date of May 17th (105 days away) at a strike of $180 for a premium of 2.15. After fees I received $202.76, which equals $1.93 per day of the Call. If the price ends up below 180 on the date, I keep the premium, if it is above 180, I sell my shares for that much only.
Thesis for this is: I believe that there is limited upside above 180, maybe we see 185-190 this year, but I’m not sold on that happening, especially in the next 3 months. At 180 the current dividend yeild would be 1.88% which is just north of the 5 year average of 1.8%, so reasonably inline with value. I would like to see that sale as currently I would gain almost $1000 of value from today, plus the premium I already got. I would then be looking to re-aquire atleast my 100 shares or more at around 160-165 which is more than plausible as at 165 the dividend yeild would be 2.04% which is a lower yeild than what it was a few months ago. Most years this name trades in a pretty predictable channel and I don’t think 160 is necessarily the bottom, but it’s unlikely to go much lower. Also, I mentioned before my option gained me $1.93/day in premiums, the new dividend on those 100 shares is only 92.6 cents per day, so I pretty much am getting and extra 2 dividend incomes for the next 3 months (aprox 6.7% annual yeild on today’s close). If the option expires sub 180, I likely roll it over again @ 180 or 185 depending on where the price is sitting at that time, maybe for even better premium should the share price continue upward.
Obviously on 100 shares this is ‘small potatoes’, but for some that have a much larger position, it’s an idea to amplify your returns with this holding and if your holding several multiples of 100 you can split up the option dates or stager your option sales so as not to be ‘lumpy’ and maybe get better premium returns. When working through ‘call date’ scenarios, I did notice that the ‘per day’ premiums continued to rise the further out I went through September which was unexpected as usually I see there is a top out after 2-3 months and then it’s diminishing value ‘per day’ beyond. I chose May one for myself, because the increases got smaller after that point, and I would like to see of if I could roll over at a higher premium in a shorter window.