Call volumes spike in classic cyclicals

Good-bye Harvey and Irma, hello recovery: That’s what some traders seemed to be thinking yesterday.

The deadly pair of hurricanes grounded thousands of flights, paralyzed rail traffic, and displaced millions of Americans in two of the country’s biggest states. But as the cleanup begins, investors are playing the rebound with some classic cyclicals that tend to follow strength in the broader economy.

The first big transaction was detected in railroad CSX (NYSE: CSX):

  • A block of 15,000 November 55 calls was bought for $1.42 and a matching number of November 60 calls was sold for $0.30. 
  • Owning calls fix the price where a security can be purchased. Selling them forces investors to deliver shares, but it also generates income. Combining the two is known as a vertical spread, fixing both an entry and an exit in one fell swoop.
  • They paid a net $1.12, or $1.42 minus $0.30. And they’ll collect $5 if CSX advances to $60 or more on expiration. That’s a potential profit of 346 percent from the stock advancing just 15 percent by expiration. Breakeven is at $56.12, and the whole position will go worthless should the stock close below $55 on expiration.
  • Large blocks appeared in the November 52.50 calls and the November 57.50s as well, which suggest an existing upside strategy was closed and rolled to the higher strike. Either way, the activity was off-the-charts bullish, with total options volume more than seven times average and calls outstripping puts by more than 60-to-1. 
  • CSX closed Thursday’s session up 0.02 percent to $52.08. The stock also hit its highest level since gapping lower in mid-July, and recently clawed back above its 50-day moving average. That might make chart watchers think it’s back on track.
CSX (CSX) 1/4/17 - 9/14/17 chart

Source: OptionsHouse by E*TRADE.

Hotel giant Marriott (NYSE: MAR) had a similar trade about three hours later. This time, investors bought 20,000 November 115 calls for $1.30 and sold 20,000 November 120 calls for $0.65. That spread cost $0.65 and will earn 669 percent from the shares climbing 13 percent by expiration. Breakeven is at $115.65 and the position will go worthless if the shares remain below $120.

MAR fell 0.36 percent to $106.39 yesterday. Like CSX, it broke out to new highs in early 2017, took a breather starting in June, but has rebounded in the last month. On top of that, both firms release earnings before November expiration, so those spreads will benefit from potentially strong results.

While there hasn’t been much news on either company of late, broader developments have given some investors the warm fuzzies. Last Friday, for instance, a central banker predicted Harvey and Irma will have a positive—rather than negative—long-time impact on the economy, despite the widespread devastation.1 There’s also been less rancor in Washington and more talk about tax cuts.2 Other reports show household income gains accelerating, while the hurricanes may have less of an impact on employment than many feared.3

Bottom line: Some traders are bullish on classic cyclicals CSX and MAR as the U.S. recovers from a monster hurricane season.


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1. CNBC: Fed's Dudley: Hurricanes will boost economic activity over the long run. 9/8/17.

2. Business Insider: Trump bucked his own Treasury secretary and every top Republican by agreeing to a deal with Democrats on the debt ceiling. 9/6/17.Marketwatch: Orrin Hatch says corporate-tax rate could go as low as 20%, favors retroactive cuts. 9/14/17

3. Marketwatch: U.S. weekly jobless claims drop ahead of Irma. 9/14/17. CNBC: US incomes are up, but not for everyone. 9/13/17.