More bullish trades in transport sector

Transports have been moving, and some traders are on board for the long haul.

The sector's 8 percent rally in the last month has left most of the market in the dust. There hasn't been a ton of company-specific news to explain the strength, but industry watchers note the healthy economy and increased demand for shipping as the U.S. recovers from three major hurricanes.1

The options market had already buzzed with bullish trades in blue chips like CSX (NYSE: CSX) and United Parcel Service (NYSE: UPS), but on Thursday activity spiked in a more obscure name that's already broken out to new highs: railcar supplier Trinity Industries (NYSE: TRN).

The trader went to work in the middle of lunch hour, buying 15,000 April 32 calls for $2.30. It also appears they exited an existing position in 7,440 January 30 calls for $2.40. Here's what it likely means:

  • Calls fix the price where investors can purchase a security, so they can make money when shares advance.
  • Yesterday's trader was probably riding a nice profit on the 30 calls, so rolled their capital forward in time. It was also one of the largest transactions in the entire market and pushed total option volume in TRN to 14 times average amounts in the previous month.
  • They paid $3.45 million for the April contracts (15,000 X 100 X $2.30) and received $1.8 million from selling the Januarys. That translates into a net cost of about $1.7 million.
  • In return for that outlay they have an additional three months–most of next year's first quarter–for the stock to potentially keep running.
Trinity Industries (TRN) 4/6/17 - 9/28/17 chart

Source: OptionsHouse by E*TRADE.

TRN rose 0.91 percent to $31.18 yesterday, its highest close in more than two years. It peaked above $50 in late 2014 as surging U.S. oil production stoked demand for rolling stock, then lost two-thirds of its value by early 2016 as energy prices dropped. It's been rebounding since.

Management has also been getting chirpier. In April, for example, CEO Timothy Wallace said results were "in line" amid "challenging" conditions, but by July things were "slightly ahead" of expectations as customers began to make "strategic purchases".2 Their next report is due around October 25. But given the cyclical nature of the industry, traders wouldn't be stunned if the stock moves on economic data before that. Next week, after all, brings key employment and industrial reports.

Long-term chart watchers may also notice how TRN is testing a high from May 2015. Is there a potential for a breakout through that resistance? Maybe that's what the options traders were thinking.

Bottom line: TRN has been quietly on the move with other transports and at least one big investor is going along for the ride.


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1. Freight recovery from Irma to last months, spike truck rates. 9/8/17. Reuters: U.S. economy accelerates in second quarter; hurricanes expected to slow growth. 9/28/17.

2. Trinity Industries corporate press releases: Trinity Industries, Inc. Announces First Quarter 2017 Results. 4/25/17. Trinity Industries, Inc. Announces Second Quarter 2017 Results. 7/25/17.