On June 21, 2017, we published a Tear Sheet highlighting a bearish option investment in Union Pacific UNP structured as a “short call spread.” The options we highlighted — a sold call option struck at $110 / share and a covering call option struck at $130 / share — expire today.
The selling price of the 110-strike call option was $5.25 / share and the buy price of the 130-strike call option was $0.64/ share, generating a net Effective Sell price of ($110 + $4.41=) $114.41. At Union Pacific’s current market price of $115.74, this structure will realize a loss of $1.33 per share on capital at risk of ($130.00 – $110.00 =) $20.00 for a period return of -6.7%.
(In my own case, I sold the 110-strike call at $5.22 / share and bought the 130-strike for $0.51, yielding an ESP of $114.71 / share, a little higher than the published one.)
Upon expiration, the $5.25 / share in the margin account will be transferred to the broker, who will also take another $1.33 / share from the cash balance of the account.
This has been the second run at this investment and both have so far resulted in losses. While this is a frustrating outcome, comparing our forecasts to the actual results reported by the firm suggests that our forecasts of operational valuation drivers is on target. Results this year have come in very close to our worst-case assumptions. You can read back through our analyses of prior quarterly results here:
- Quick Take: Union Pacific’s 1Q17 Earnings
- Union Pacific 2Q17 Earnings: Driving Toward our Worst Case
- Union Pacific 3Q17 Earnings: This Train is on the Wrong Track
In addition, the continued threat of problems related to NAFTA negotiations provide a significant potential catalyst for a market revaluation to the downside.
While I am never happy to realize a loss, the actual performance of the firm leads me to believe that I should continue to be patient. For a review of the portfolio management of a bearish position in Union Pacific, please see this lesson in the Union Pacific Guided Tear Sheet:
I will publish another Tear Sheet on UNP on Monday and will take another bearish position in the stock next week.
Please feel free to post comments and / or questions to the Framework Forum thread about the Union Pacific investment.