Pre-earnings trades exploiting fears

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United Parcel Service and Norfolk Southern report earnings today, and some bulls are exploiting the fears of others.

optionMONSTER's Heat Seeker tracking system detected trades that took advantage of higher prices in the puts than the calls. Both transactions let the investors get long at modest risk without spending a penny of cash.

In the first, about 3,500 September 65 puts were sold on NSC for $0.40 and an equal number of September 85 calls were purchased for $0.30, resulting in a credit of $0.10. He or she now stands to earn unlimited profits if the railroad stock surges past $85 by expiration. The shares ended yesterday's session up 0.31 percent to $76.45.

In UPS, they sold 10,000 September 65 puts for $0.30 and bought an equal number of September 80 calls for $0.18, resulting in a credit of about $0.12. UPS fell 0.15 percent to $74.05. The shipping giant reports earnings this morning, while NSC is scheduled for after the close.

The noteworthy thing about the transactions is that volatility was much higher in the puts than the calls, which let the investors collect credits even though the stocks were trading closer to the strike prices on the calls.

The disparity resulted from nervousness before earnings and is an example of how experienced traders can profit from the fears of others. However, both positions risk of losing money if the stocks experience significant drops. (See our Education section)

(A version of this post appeared on InsideOptions yesterday.)



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Options

Referenced Stocks: NSC , UPS

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