Union Pacific recently made a list of five stocks set to take off if the market rallies. Plus, UNP stock ranks No. 1 in its industry group, according to IBD Stock Checkup.
The megacap transport play, with a $159 billion market value, owns a Composite Rating of 91, and EPS Rating of 85 and a Relative Strength Rating of 87.
The stock is also sitting above a rising 21-day exponential moving average, as well as the 50, and 200-day simple moving averages.
Let's assume a trader has a price target of 260 between now and mid-March. One way to take advantage of that opinion using options is to trade a bull call spread. A bull call spread is a defined risk trade, so you always know the worst-case scenario in advance.
Create a bull call spread by buying a call and then selling a further out-of-the-money call.
Union Pacific Stock: Setting Up The Bull Call Spread
Selling the further out-of-the-money call reduces the cost of the trade, but it also limits the upside.
Going out to the March 18 expiration, a 255-strike monthly call option was trading around $3.85 on Tuesday, and the 260 call was around $2.20.
Buying the 255 call and selling the 260 call would create a bull call spread. The trade cost would be $165 (difference in the option prices multiplied by 100), and the maximum potential profit would be $335 (difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk defined strategy, so if UNP closes below 255 on March 18, the most the trade could lose is the roughly $165 premium paid.
Potential gains get capped above 260. So no matter how high Union Pacific stock might go, the most the trade could profit is $335.
When To Cut Losses
In terms of trade management, if the stock dropped below 240, I would consider closing early for a loss.
UNP has already reported Q4 earnings, so there should be no earnings risk with this trade.
More aggressive traders may prefer just to buy the 255-strike call in Union Pacific stock. A long call trade has unlimited upside potential.
Please remember that options are risky, and investors can lose 100% of their investment.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ.
