Ride the Rails with IYT

The iShares Transportation Average ETF (IYT) is a price-weighted ETF dominated by rail, trucking and freight companies. The top 10 holdings comprise 77% of the ETF, with nearly half of that coming from four railroad names – Kansas City Southern, Norfolk Southern, Union Pacific and CSX. Other familiar names in the top 10 include FedEx and UPS.

The transportation sector has been hot since the March 2020 bottom, as shown by IYT’s gain of more than 130%. The ETF hit a record high a month ago but has retreated 4% in the past month with rising fuel prices (crude oil hit a two-year high this week) taking a bite out of profits. The overall uptrend is intact, however, guided by IYT’s 50-day moving average. The trendline’s steady increase has hardly changed during IYT’s recent sideways price action. More importantly, IYT has not closed a single day below the 50-day since February 3. But now the trendline is being tested, as IYT sits just one percent above this support.

We’re banking on this support holding and for the long rally to continue. Our credit spread’s short strike is below the 50-day, so a hold at this trendline would keep our spread out of the money.

If you agree that IYT will stay above its 50-day moving average, consider the following trade that relies on the stock remaining above 265 through expiration in six weeks.

Buy to Open IYT 16Jul 260 put (IYT210716P260)
Sell to Open IYT 16Jul 265 put (IYT210716P265) for a credit of $1.45 (selling a vertical)

This credit is $0.03 less than the mid-point of the option spread when IYT was trading above $270. Unless the ETF rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $143.70. This trade reduces your buying power by $500 and makes your net investment $356.3 ($500 – $143.70).  If IYT closes above $265 on July 16, both options will expire worthless and your return on the spread would be 40% ($143.70 / $356.30).