Traders are growing more uneasy about the chances for a stimulus bill passing in the U.S. Senate.
Speaker of the House Nancy Pelosi set a 48-hour deadline for passing a stimulus bill before the election, and that deadline applies to her negotiations with Treasury Secretary Steve Mnuchin. We still don’t know whether Senate Republicans will cooperate with the White House.
Meanwhile, pandemic-related restrictions are going back into place in the U.K. and Europe, which could be a sign of things to come in the U.S. At the very least, they will affect the global economy.
While we can’t predict the effect of shutdowns in Europe, we still feel the odds favor a successful stimulus bill if for no other reason than political expediency (on both sides). If we are correct, then consumer and business spending should remain stable in the short term.
However, we still want to be cautious about increasing our exposure to consumer stocks right now. A bullish position in United Parcel Service (NYSE:UPS) is the right balance between consumer and business spending.
Look to FedEx for Clues About UPS
We have been watching UPS for a few weeks since the FedEx (NYSE:FDX) report. Shippers like UPS and FDX are well-positioned to take advantage of spending as businesses and consumers further shift their selling and buying habits online.
We don’t know all the details of Amazon’s “Prime Day” performance yet, but the company has given us some interesting tidbits of information. For example, third-party sellers saw an increase of 60% over the prior year, which we think is a big positive for online shopping (and shipping) generally.
When FedEx reported earnings last week, it was frankly unbelievable. The company beat expectations handily, coming in at $4.87 earnings per share versus an expected $2.59 per share.
FedEx owes its success to greater U.S. domestic-package volume and a surge in residential deliveries.
FedEx’s early earnings report is often a way for investors to gauge how well businesses are doing. More business spending at FedEx theoretically shows strength.
In this case, we’re not using the report to get an idea about the broader economy. We just want to know how UPS will do when it reports on Oct. 28. Based on how investors are treating the stock, though, you’d think it was in an entirely different business from FedEx.
A Profitable Play on Playing Catch-Up
From a technical perspective, UPS has been pulling back over the last few days, which we think is related to general weakness in the market rather than an issue with the stock.
Daily Chart of United Parcel Service (UPS) — Chart Source: TradingView
The fact that UPS has been underperforming FDX leads us to believe that support around $170 per share is more likely to hold and serve as a pivot when traders realize the stock is undervalued compared to its peer.
Traders can take advantage by selling a put write against the stock, and if they look at expirations beyond UPS’s earnings report on Oct. 28, they can collect a lot of extra premium.
A strategy like this increases the risk you’re taking on. If UPS disappoints, it could drop, and you could be put the stock. But the premium on UPS options is also wildly inflated right now. In our view, the risk/reward in a situation like this is justified.
To make this position a little less risky, we think setting a strike price below support at $170 is best.
If UPS bounces before earnings, traders may want to consider an early exit, but we think the most likely outcome will be a rally after earnings at the end of the month. Selling the puts now allows you to earn more income and gives you an extra two weeks for time-value erosion to occur.
On the date of publication, John Jagerson & Wade Hansen did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
John Jagerson & Wade Hansen are just two guys with a passion for helping investors gain confidence — and make bigger profits with options. In just 15 months, John & Wade achieved an amazing feat: 100 straight winners — making money on every single trade. If that sounds like a good strategy, go here to find out how they did it.