UNP July 25th Options Begin Trading

Analysis of Union Pacific (UNP) options reveals potential strategies for investors. Selling a $215 put offers a 1.63% return if it expires worthless, while a covered call strategy at the $225 strike yields 4.28% if the stock is called away; probabilities of these options expiring worthless are 62% and 57% respectively. The implied volatility for the put and call options are 24% and 25% respectively, compared to the actual trailing twelve month volatility of 23%.

Analysis

The article presents two options strategies for Union Pacific Corp. (UNP), currently trading at $219.79 per share. Firstly, selling-to-open a put contract at the $215.00 strike price with a bid of $3.50 could result in an effective share purchase price of $211.50, a discount of approximately 2% from the current market price. There is a 62% probability, based on current analytical data, that this put option will expire worthless, in which case the seller would realize a 1.63% return on the cash commitment, equating to an 11.88% annualized yield (termed "YieldBoost"). Secondly, for investors holding or purchasing UNP shares, a covered call strategy involving selling-to-open a call contract at the $225.00 strike price (a ~2% premium to current price) with a bid of $4.20 is discussed. If the stock is called away at the July 25th expiration, this strategy would yield a total return of 4.28% (excluding dividends). There is a 57% probability of this call option expiring worthless, which would provide the investor with a 1.91% premium return, or a 13.95% annualized YieldBoost, while retaining their shares. The implied volatility for the put is 24% and for the call is 25%, both slightly above the actual trailing twelve-month volatility of 23%, suggesting option premiums may be marginally elevated compared to recent historical price movements.

Key Decisions for Investors

• Investors interested in acquiring UNP shares at a price below the current market level could consider selling the $215 put, which offers a potential entry point at $211.50 or an 11.88% annualized return on cash if the option expires worthless, noting the 62% probability of such an outcome.
• Existing UNP shareholders or those initiating a long position at $219.79 could evaluate selling the $225 covered call to generate income, potentially achieving a 4.28% total return if called by the July 25th expiration or a 13.95% annualized yield if it expires worthless, while being mindful of the capped upside potential above $225.
• Given that implied volatilities (24-25%) for these UNP options are marginally higher than the stock's 23% trailing historical volatility, option selling strategies might offer slightly enhanced premiums; however, investors should assess these opportunities in conjunction with the stated probabilities of expiration and their own outlook for UNP.