UNP - top of its trading range

With the S&P closing above 1400, a lot of traders have become short-term bullish. This includes myself as I have also made short-term directional bets (via debit spreads) that SPY will make it to 144/145 before finding more resistance.

It is certainly possible that this bullish sentiment has gotten a little out of control, or even perhaps that this move is just a head fake. If you agree of this possibility then you might want to consider balancing your option portfolio by keeping some bearish bets open. Below is a specific way to do just that.

I have been championing the recent move of UNP, ever since it broke out of its ascending triangle pattern at the beginning of April. That said, I think it has become a little bit overextended for the following reasons:
1) UNP has a 2 day RSI of 98.99
2) UNP is now trading at the top of its trading range
Long-term I'm still bullish on UNP; I just like its chance of a pullback. I also think that a realistic price target for this pullback would be former resistance (or 137ish)


Given the aforementioned price target, you could always buy AMT or ITM puts. If you wanted to shoulder some of that expense to help spread out your capital, you could buy a put debit spread (same as vertical spread, same as bear put spread).

Buy the 145 Puts and sell the 135 Puts
This will give you a breakeven point of 142 while risking $305 for a reward of $695. This has a decent risk/reward ratio. The breakeven point refers to 'at expiration'. Ideally, UNP would pullback in one week, you could liquidate your position, lock in 80% of your potential profit, and remove 100% of your risk.

You could buy the 145s and sell the 140s. This will give you a breakeven point of 143 while risking $190 for a reward of $310. Your probability of success goes up (higher B/E point) but your risk/reward ratio goes way down. It's a constant trade-off, as always with options, between risk and reward.