The railroad sector posted gains yesterday on news of Berkshire Hathaway’s purchasing a major stake in the Burlington Northern Santa Fe Corp. (BNI) and may potentially invest in two other U.S. railroads. Today, the PowerOptions weblog will take a look at covered call investments with the potential of benefiting from this news.
An audio podcast of this article is available at: poweropt.com/podcasts/2007_04_10_RAIL.mp3
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Berkshire, a company principally masterminded by the well-known investment guru Warren Buffett, is stepping into a sector where first-quarter results may suffer from weak shipping volumes. The railroad shipping volume decrease is largely attributed to weak sales in the auto and housing sectors. Although, some analysts are expecting a slight boost in volume as farm products such as ethanol become more widely transported.
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Yesterday, transportation shares gained the most among 24 industries in the S&P 500, jumping 2.8 percent. A measure of railroad companies in S&P indexes also climbed in value.
Burlington Northern added $3.48, or 4.2 percent, to advance to $86.20 a share. Berkshire bought a 10.9 percent stake in the company, the second-largest U.S. railroad.
CNBC reported Berkshire has also bought “major” stakes in two other North American railroad companies. Warren Buffett declined to identify them, CNBC said.
|PowerOptions covered call search Railroad Sector (40 days)|
|ARII||$29.63||UKUEF||07 MAY $30.00||$1.30||4.40%||4.60%||5.90%|
|WAB||$34.33||WABEG||07 MAY $35.00||$1.10||3.20%||3.30%||5.30%|
|FLA||$63.93||FLAEM||07 MAY $65.00||$1.95||3.10%||3.10%||4.90%|
|GBX||$23.13||GBXEX||07 MAY $22.50||$1.45||6.30%||3.80%||3.80%|
ARII – American Railcar designs and manufactures railcars in North America. This trade involves the May $30 call option and offers 4.4% downside protection and 5.9% potential profit if the stock is above the $30.00 strike price at the end of the option period. The stock is currently trading at $29.63.
WAB – Westinghouse Air Brake Technologies Corporation develops components such as brakes, gears and couplers for the rail industry. This trade involves the May $35 call option and offers 3.2% downside protection and 5.3% potential profit if the stock is above the $35.00 strike price at the end of the option period. The stock is currently trading at $34.33.
FLA – Florida East Coast Industries operates regional freight railroads in the southeastern United States. This trade involves the May $65 call option and offers 3.1% downside protection and 4.9% potential profit if the stock is above the $65.00 strike price at the end of the option period. The stock is currently trading at $63.93.
GBX -Greenbrier Companies engages in the design and manufacture of railroad freight car equipment in North America and Europe. This trade involves the May $22.50 call option and offers 6.3% downside protection and 3.8% potential profit if the stock is above the $22.50 strike price at the end of the option period. The stock is currently trading at $23.13.
Competitors for ARII include: Trinity Industries Inc. (TRN), Millennium Rail, Inc. (private), Union Tank Car Company (private), and FreightCar America Inc. (RAIL).
Competitors for WAB include: Trinity Industries Inc. (TRN), and GE Infrastructure (private).
Competitors for FLA include: CSX Corp. (CSX), Patriot Transportation Holding Inc. (PATR), and Echelon Development LLC (private).
Competitors for GBX include: GATX Corp. (GMT), Trinity Industries Inc. (TRN), ACF Industries LLC (private), and FreightCar America Inc. (RAIL).
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[tags] Berkshire Hathaway, Warren Buffett, CNBC, Millennium Rail, Inc., Union Tank Car Company, GE Infrastructure, Echelon Development LLC, ACF Industries LLC, BNI, Burlington Northern Santa Fe Corp., CSX, CSX Corp., GMT, GATX Corp., RAIL, FreightCar America Inc., TRN, Trinity Industries Inc., covered call investment strategy, investment strategy, iron condor, poweroptions, stock option trading, stock options [/tags]