Trading Nation

This stock is so bad, it could be good: Trader

The rail stock on track to rally this week: Trader

The is down more than 9 percent in 2015, widely underperforming the broader market. But according to options trader Andrew Keene, one of the index's worst performers could be on the fast track to rally after reporting earnings later this week.

"I am looking to play Union Pacific to the long side here," Keene said Monday on CNBC's "Trading Nation."

But as he sees it, a combination of recent chart consolidation, bullish activity in the options market and positive earnings out of rival CSX could translate to big gains for the stock in the near future.

"Union Pacific has been consolidating in the $96 to $97 range," said Keene, founder of Keene on the Market. "I see it rallying back up to its moving average." He pointed to the 50-day and 20-day moving averages, which come in at a respective $100 and $97, for an idea of where the stock could settle in the next few days.

Shares of the beaten railroad company gained some steam Monday, closing up nearly 1 percent, but are still down more than 17 percent since the start of 2015.

It's the recent bout of unusual options activity that's really grabbing Keene's attention. "We saw a large institutional buyer of about 3,000 of the July 24 weekly 98-strike calls for $1.55," he added. Since each call option accounts for 100 shares of stock, this buyer is willing to pay $465,000 to bet the stock will rally above $99.55 by Friday.

So taking a cue from the charts and options market, Keene made a bullish bet of his own. Specifically, he purchased the July 24 weekly 100/101 call spread for 25 cents. This trade is profitable if shares of Union Pacific rise above $100.25, or 2 percent higher, by Friday.

"I'm only risking $25 on this trade to make a potential $75," said Keene. "That would give me 300 percent returns on a very small move," he added.

Union Pacific is set to report results Thursday before the opening bell. Wall Street analysts surveyed by FactSet are expecting the company to post earnings of $1.35 per share, 8 cents lower than last year.

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