For a company with such a plain business model United Parcel Service, Inc. (NYSE:UPS) stock is very choppy. It rallied as much as 40% from the January 2016 low to the December high. It has since given back more than 10% but still is within that much of its all-time high.
Fundamentally UPS stock is relatively expensive from a price-to-earnings perspective, but analysts don’t expect much of it. So if there were to be a surprise it would likely be to the upside. This is the opposite case of that of FedEx Corporation (NYSE:FDX), where analysts are more likely set up for a disappointment.
Even though UPS trades in a choppy manner, it does it within predictable ranges and this makes trading its stock using options relatively easy. There I can sell risk against proven support levels and let time do the rest.
Click to Enlarge Since 2013, UPS stock has been doing battle just above the $100 area. During that time, the century mark has served as support and resistance more than a dozen times.
There have been extreme highs and lows around it but somewhere in the middle lies the truth. Just like $92 per share was too low, $120 was too high.
Today I want to range the price action for the next few months by selling risk against extremes.
UPS Stock Trade Idea
The Bet: Sell the UPS Oct $90 put naked. This is a bullish trade for which I collect $1 per contract. There I have 90% certainty that the stock will stay above my strike so the trade expires worthless in my favor and for maximum gains. Otherwise I would be put the stock and suffer losses below $89.
If selling naked puts is not possible, I could turn this into a credit put spread where the dollars at risk are smaller.
The Alternate: Sell the UPS Oct $95/$90 credit put spread. This setup has a slightly smaller buffer so just a tad lower chance of success, yet still yield 13% on risk.
On a bounce, I would entertain selling upside risk for balance.
The Hedge (Optional): Sell UPS Oct $120/$125 credit call spread for 20 cents, where I have an 80% chance of adding profits provided UPS stays below my sold risk. I could go lower for more premium and I will make that decision when I decide to engage the short side.
E-mail sellspreads@gmail.com with questions or join me to learn more about options in a personal 1on1 webinar here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
