HRZ Horizon Lines

Scurrying my eyes across a table of hedge fund returns, I quickly spot a strategy titled "equity long/short". I have always been fascinated with the managers of long/short funds. In my opinion, such managers are the genuine stock-picking experts. Not only do they purchase the healthy stocks, but they also sell short the unhealthy.

Although a "long/short" equity fund may cover a wide range of trading strategies, the majority of funds invest one particular industry group. For instance, a manager may wish to specialize in the telecom industry and might short AT&T and buy long Verizon. Any event that causes all telecom stocks to fall will cause a profit on the Verizon position and a matching loss on the AT&T position. Similarly, events that cause both stocks to rise, e.g., a climb in the broad markets, will have little or no effect on the overall position.

To make money, the manager hopes his long position will rise further than his short position or his short position will fall further than his long position. This is where his/her stock picking abilities are truly displayed. Lucky for us, we can quickly and easily apply the Zacks Rank to scan for stocks within the same industry group. For instance, here is a list of the top three and bottom three stocks in the transportation industry group.

Zacks #1 Rank (Strong Buy)

• Aircastle (AYR)
  
• Trinity (TRN)
  
• Expeditors (EXPD)

Zacks #5 Rank (Strong Sell)

• Ship Finance Intl. (SFL)
  
• Tidewater (TDW)
  
• Horizon (HRZ)

If we wish to trade options, my first instinct might be to buy calls on the bullish stocks and buy puts on the bearish stocks. I, however, prefer a less time sensitive trade. For instance, I may trade bull put spreads on the Zacks #1 Rank stocks and bear call spreads on the Zacks #5 Ranks.

Bull Put Spread

• Stock: TRN
  
• Sell 30 put for $.90
  
• Buy 28 put for $.50
  
• Net Credit: $.40

Bear Call Spread

• Stock: SFL
  
• Sell 17.5 call for $.75
  
• Buy 20 call for $.08
  
• Net Credit: $.67

By trading two credit spreads, I've eliminated the fear of a sideways moving stock and/or a sideways moving industry. Likewise, I've maintained one bullish trade and one bearish trade in the same industry group.

You can learn more about different types of option strategies by downloading our free options booklet: 3 Smart Ways to Make Money with Options (Two of Which You Probably Never Heard About). Just click here.

And be sure to check out our Zacks Options Trader service, which was up 42.8% last year and is up 30.74% so far this year.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

 
AIRCASTLE LTD (AYR): Free Stock Analysis Report
 
EXPEDITORS INTL (EXPD): Free Stock Analysis Report
 
HORIZON LINES-A (HRZ): Free Stock Analysis Report
 
SHIP FIN INTL (SFL): Free Stock Analysis Report
 
TIDEWATER INC (TDW): Free Stock Analysis Report
 
TRINITY INDS IN (TRN): Free Stock Analysis Report
 
Zacks Investment Research