Union Pacific Option Trader Makes $1.2M Bet On 5% Downside

Union Pacific Corporation UNP shares are up 43.1% in the past three months. The railroad giant appears to be chugging along thanks to optimism that the U.S. economy is on the track to a full recovery in the long-term. However, one large option trader on Monday morning made a big bet that the Union Pacific rally will soon be derailed.

The Union Pacific Trade

On Monday morning, Benzinga Pro subscribers received an option alert related to an unusually large Union Pacific trade:

• At 10:06 a.m., a trader purchased 2,000 Union Pacific put options with a $165 strike price expiring on July 17 at the ask price of $6.151. The trade represented a more than $1.23 million bearish bet.

Why It’s Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large size of Monday’s Union Pacific option trade, it could certainly be institutional hedging.

Union Pacific’s COVID-19 Rebound

Union Pacific shares traded slightly higher on Monday without any major news from the company.

Last week, Deutsche Bank analyst Amit Mehrotra said he is bullish on transportation stocks given freight capacity demand bottomed in late April and is now on a “slow-and-steady recovery path.” Despite concerns over a potential second wave of COVID-19 infections, Mehrotra reiterated his Buy rating for Union Pacific and raised his price target from $170 to $171.

Other analysts, such as CFRA’s Colin Scarola, have said Union Pacific’s large rally off the March bottom has the stock fully valued given its near-term earnings outlook. Scarola is projecting $7.71 in EPS in 2020 and $8.63 in EPS in 2021, just 2.9% higher than 2019 earnings.

Benzinga’s Take

The expiration of the Union Pacific puts purchased on Monday is likely no coincidence given they expire on July 17, exactly one day after the company reports second-quarter earnings. The large option trader may be betting that a second coronavirus wave derails the market in the next month, that Union Pacific disappoints the market with a rough earnings report or simply that traders will take profits in the stock prior to or immediately after earnings as part of a sell-the-news event.

Regardless of the bearish thesis, the break-even price of the puts is $158.85, suggesting 5.4% downside for Union Pacific shares over the next month.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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