Rails on Fire

Playing the “Catch-Up” Effect

By Bryan Bottarelli
Thursday, May 17, 2007 10:55 AM EDT
Thu, 17 May 2007 14:55:00 GMT

Dear Bottarelli Research Member,

The major railroad stocks have been on fire lately — and I’d like to make a quick momentum play based on something that I call the “catch up” effect. As a brief backdrop, railroad stocks got a minor jolt yesterday after both Carl Icahn and Warren Buffett separately disclosed stakes in railroad operators and equipment suppliers.

Icahn disclosed a 2.7 million-share stake in CSX (CSX – NYSE) and a 6.1 million stake in American Railcar Industries (ARII – NASDAQ). At the same time, Berkshire Hathaway also revealed a 6.4 million stake in Norfolk Southern (NSC – NYSE) and a 10.5 million stake in Union Pacific (UNP – NYSE).

As I scan the rail sector, I’m watching shares of Norfolk Southern (NSC – NYSE) hit new 52-week highs, as you can see below:

NSC

But at the same time, shares of Burlington Northern Santa Fe (BNI – NYSE), while also making a strong upside push, have yet to break into new high territory. As a result, I think we could see a “catch-up” effect in the entire sector that moves BNI up alongside NCS to new 52-week highs. I’d like to play BNI calls to capitalize on this move:

BNI

PLAY: Buy the BNI June 95 Calls (BNI FS) at or under $2.60, good for the day. Current bid/ask spread is $2.30 to $2.45. Place a protective stop limit at $1.30.

Making a similar move is oil servers Diamond Offshore Drilling (DO – NYSE) and Transocean (RIG — NYSE).

DO

Both stocks tend to trade in lock-step, and DO just set a new 52-week high while RIG has yet to push up at an equal pace. Therefore, I’d also like to also play calls in RIG to capitalize on a move up to a new high.

RIG

PLAY: Buy the RIG June 90 Calls (RIG FR) at or under $3.80, good for the day. Current bid/ask spread is $3.60 to $3.70. Place a protective stop limit at $2.00.

At the same time, maintain your DE June 120 Puts (DE RD) and your ISRG June 130 Puts (AXQ RV).Both positions have been in the profit zone today, but I think all it’ll take is one downside market push to see some nice returns on each position. For now, hold both puts more gains.

And finally, if you have yet to join our new small-cap service, I urge you to act quickly. The May 31st cut-off date is fast approaching, so be sure to grab one of these spaces before they’re completely sold out. Click below for your “member’s only” invitation:

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Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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