Sold 104.712 PUTs on Norfolk Southern Railroad

Norfolk Southern Railroad

Within the railways pool of investments for the Club’s Value Investment Fund, Norfolk Southern Railroad is considered one of the better investments of the six existing railroads in the pool (soon to be five with the merger of Canadian Pacific and Kansas City Southern). It is a highly stable company and rarely performs poorly, either financially or via key performance indicators. Thus, the sale of PUTs on Norfolk Southern Corporation are a safe and relatively low risk options investment.

A PUT is the sale of an insurance policy to an existing holder of stock. The idea is that IF the market price for the stock should suddenly depress to a particular price, ‘Strike Price’, the current holder of the stock can force the seller of the PUT to buy the stock from the current owner of the PUT at that strike price. In effect, the PUT acts as a floor price for the stockholder.

If the reader reviewed the articles on this site concerning Norfolk Southern Railroad, the current intrinsic value of Norfolk Southern Railroad is $204 per share. A reasonably desired margin of safety is 10%. The investment fund was able to sell the PUTs for a strike price of $190 per share. The current market price for Norfolk Southern Railroad on 03/26/2021 is $273 per share. The entire railroad industry is currently at or near the all-time high prices; in effect, the railroad industry is in strong favor with the market.

The table below, specifically the highlighted line for the sale of PUTs tells the story of this transaction.

Norfolk Southern Railroad

The fund sold 104.7120 PUTs at $4.20 each. Throughout this entire series of transactions related to value investing, the fund uses an across the board transaction fee of $1 per share no matter the transaction type. Thus, the fund nets $3.20 per share. The investment fund model limits the sale of PUTs at their respective strike prices plus $1 per share to no more than 80% of the fund’s current fair market value. The current fair market value of the fund is $143,646 on Friday the 26th of March, 2021.

This sale of PUTs, if exercised by the owner of the PUTs, obligates the fund to spend exactly $20,000. The risk period is just a tad under 10 months. It is expected that the intrinsic value for Norfolk Southern Railroad will rise to a bit more than $210 per share over the next 10 months. Thus, an opportunity to own Norfolk Southern Railroad at $190 per share is welcomed and desired. Norfolk Southern Railroad is simply an excellent investment and it is highly unlikely that these PUTs sold will be excercised; but if they are, it is welcomed.

Total earnings from the sale of these PUTs are $335.07 after fees. This amount is added to the cash account of the Value Investment Fund. Act on Knowledge.

Value Investing Episode 1 – Introduction and Membership Program