Ackman Activism Deja Vu Evoked as Railroad Options Surge

Updated on

Bullish options on railroad stocks including CSX Corp. have surged amid speculation that an activist investor is building a stake in one of the companies.

Contracts that pay off should CSX Corp. shares climb 10 percent within three months have reached the most expensive level on record compared with options that profit if the shares drop. Calls on Norfolk Southern Corp. climbed to the highest level compared with puts in seven years.

CSX’s stock jumped 11 percent last week as trading volume ballooned to more than double the five-year average. To UBS AG analyst Thomas Wadewitz, the trading was reminiscent of what occurred with Canadian Pacific Railway Ltd. when billionaire hedge-fund manager William Ackman was buying shares prior to a proxy fight that led to a boardroom coup.

“It seems to be contagious among the industry,” Jim Smith, an options strategist at OTR Global Trading LLC in Purchase, New York, said by telephone. “Even at the hint of activism people seem to jump on these things, even if it doesn’t follow through.”

Ackman’s Pershing Square Capital Management LP loaded up on shares of Canadian Pacific and then campaigned for the ouster of former Chief Executive Officer Fred Green in 2012. The board then installed Ackman pick Hunter Harrison to lead a turnaround effort at that railroad.

While the trading in CSX last week could be the result of a non-activist investor building a large stake in the company, UBS’s Wadewitz said there are broad similarities between the recent volume and price move in CSX stock, and the activity in Canadian Pacific at the beginning of Ackman’s campaign. CSX added 0.4 percent to $36.95 on Wednesday.

‘Driving Improvement’

“This large investor could be an activist-style investor who would eventually highlight the position and make public strategies for driving improvement,” Wadewitz wrote.

CSX spokeswoman Melanie Cost said the company does not comment on market activity.

Implied volatility, which is used to gauge the cost of options, for three-month calls betting on a 10 percent gain in CSX shares rose to 35.35 on April 21. That was only 0.2 point less than puts with a strike price 10 percent below the shares, marking the most expensive level for bullish contracts in Bloomberg data going back to 2005. The same day, Canadian Pacific CEO Harrison told Reuters that shareholder activism was “long overdue” at some railways.

The price relationship known as skew showed that bullish three-month options on Norfolk Southern reached the most expensive since 2008 last week.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE