Medium-Term Play In The Transports

Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying that, "the time to buy is when there's blood in the streets." Warren Buffett said: “There seems to be some perverse human characteristic that likes to make easy things difficult.” I followed both of their advice. The transports have been hammered as of late. This was largely due to the precipitous fall in crude oil. Sure, it costs less to run your trains, but the lack of productivity in the oil fields had a way bigger effect. At least for now, crude has found its bottom. It stands to reason that the transports will move up with crude, and the economy continues improve. I looked for a transport equity that had experienced an especially hard time during the downturn. Specifically, I am looking at Union Pacific Railroad (NYSE:UNP). Take a look at the chart:

Can it go lower? It certainly can, but if I buy myself some time, I can provide myself with a very nice profit scenario with limited defined risk. I don’t expect UNP to move up in a very discrete manner (really fast), more of a “grind” up. For this type of trade, I like to employ a long calendar spread. It gives me a lot of options. If our price scenario works right away, I can simply sell out my calendar. If we do grind up very slowly, I can continually roll the short side of the calendar as each expiration date comes to pass. I signaled the following set-up:
Sell (opening) the UNP July 2nd (weekly) expiration 105 strike call
Buy (opening) the UNP August expiration 105 strike call

For a debit of $1.30 or less.


Following Rothschild and Buffett’s sage advice, I bought when there was blood on the streets, and I didn’t try to complicate things by making my approach any more complicated than it needed to be. Stayed tuned this summer!