Sold PUTs on Norfolk Southern Railroad | Value Investing

This morning, 09/29/22 at 10:37 AM, the Value Investment Fund sold 200 PUTs on Norfolk Southern Railroad at $6.20 netting $5.20 each after transaction fees. These PUTs have a strike price of $145 each and expire on January 19, 2024.

The Fund uses options, specifically PUTs, to augment the income and boost the overall return of the Fund. The concept is simple. The Fund wants to own certain pre-qualified investments at certain prices; that is, market prices that are well below intrinsic value as calculated for the respective investments. These investments are basically top 2,000 companies trading in the United States, have a good history of performance and are highly stable. Currently, there are 49 researched potential investments spread among 8 different industry pools. Within the Railroads Pool sits a well respected and well managed railway, Norfolk Southern Railroad.

On average, Norfolk Southern has earned more than $6.80 per share over the last 11 years. It pays a dividend of more than $4.80 per year and there is nothing in the financials that would indicate retraction of cash flow or future dividend payouts. Thus, at $4.80 per share, actual ownership equates to a dividend yield in excess of 3.25%. This is simply a rock solid company and the Fund would love to be forced to buy this stock at $145 per share. There is 15 month window of risk here; but the risk is a desired risk, the Fund wants to own this stock at this price. The current intrinsic value exceeds $196 per share. At $145 per share, it is a value investor’s dream situation.

The sale of these PUTs earns the Fund $1,040 with a commitment of $29,200 including transaction fees. 

The Value Investment Fund’s current exposure related to PUT options is as follows:

• Union Pacific Railroad – sold in Feb 2020 with a strike price of $155/share and an expiration date of January 21, 2023                 $20,129
• JP Morgan Chase – sold in May 2022 with a strike price of $80/share and an expiration date of June 16, 2023                                $20,247
• Essex Property Trust, Inc. – sold in May 2022 with a strike price of $260/share and an expiration date of October 21, 2022          $20,880
  
• Essex Property Trust, Inc. – sold in June with a strike price of $240/share and an expiration date of October 21, 2022                   $24,100
• Norfolk Southern Railroad – sold in Sept 2022 with a strike price of $145/share and an expiration date of January 19, 2024         $29,200
  *Commitment value includes transaction fees to purchase the respective shares.

Market prices on Sept 29, 2022 are:

• Union Pacific Railroad (Expiration on 01/21/2023)                 $199.20  (Strike Price of $155.00) Current Deviation = 22.18% 
• JP Morgan Chase (Expiration on 06/16/2023)                          $106.16  (Strike Price of $80.00)  Current Deviation =  24.46%
• Essex Property Trust, Inc. (Expiration on 10/21/2022)            $244.70  (Strike Price of $260.00/$240.00) Current Deviation =  -5.88%/1.9% Respectfully
• Norfolk Southern Railway (Expiration on 01/19/24)               $214.55  (Strike Price of $145) Current Deviation = 32.42%
  *Deviations > 25% or PUTs are considered favorable and require no reserves.

At this point, only Essex Property Trust, Inc. is a risk of having to act on 10/21/22. The Fund currently has $25,100 of cash available to honor the strike price of $260 per share. It is conceivable that the strike provision batch at $240 per share will also be unfavorable on October 21, 2022. If so, the Fund will sell an existing positive position in one of its existing investments to honor the Option sold. Act on Knowledge.

© 2022, David J Hoare MSA. All rights reserved.