Burlington Northern (BNI) hit with $345M penalty

Posted Feb 19th 2009 2:12PM by Brent Archer
Filed under: Bad News, Law, Options, Technical Analysis, Burlington Northern Santa Fe (BNI)

Burlington Northern Santa Fe (NYSE: BNI - option chain) stock is falling today after the Surface Transportation Board ruled that the company overcharged two Western power companies for coal shipments. The agency gave BNI a $345 million penalty. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on BNI.

This morning, BNI opened at $61.70. So far today the stock has hit a low of $61.20 and a high of $63.98. As of 11:45, BNI is trading at $62.45, down $1.26 (-2.0%). The chart for BNI looks neutral and S&P gives BNI a 3 STARS (out of 5) hold ranking.

For a bearish hedged play on this stock, I would consider a July bear-call credit spread above the $85 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in five months as long as BNI is below $85 at July expiration. Burlington Northern would have to rise by more than 35% before we would start to lose money. Learn more about this type of trade here.

BNI hasn't been above $85 since November and shown resistance around $81 recently.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in BNI.

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