Union Pacific (UNP) is down $3.21 to $34.75 and three-year lows. Options voloume is running at 4X the normal levels and part of the increased activity is due to a substantial risk/reversal that traded on the PHLX, when an investor apparently bought 5000 Aug 25 puts for $2.175 and sold 5000 Aug 35 calls for $5.20 against shares at $34.25.

This strategy is also known as a “collar” and is bullish. Often times, rthe strategist will buy shares at a price midway between the strike price of the puts and calls. Not in this case. Instead, the strategist sold at-the-money calls and collected $5.20. The sale of the calls reduces the cost of shares to $29.05. Out-of-the-money puts were bought for $2.20 ($2.175 actually, but to keep it simple…). The cost per share is then $31.25. The upside through the August expiration is limited by the strike price of the call, or to $35 (+12 percent). The downside is limited by the $25 strike put (-20 percent).
The strategist is therefore risking 20 percent to make 12 percent. Why would they do this? Chances are, this investor wants to take possession of the shares and is bullish on UNP longer-term. However, given the recent volatility, they want a hedge for the next few months. In short, this type of collar can provide a hedge in this volatile market.