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UPS (UPS) options action calls for extended upside

Shares of United Parcel Service Inc. (NYSE: UPS ) are rallying relatively in-line with the broad-market strength on the day Monday without any notable news from the company. Options action on the tape suggests at least one investor expects upside during the next couple of months and chose to express that bet by trading synthetic long stock (split strikes) positions.

UPS has gained $1.32, or more than 2%, to $66.32 so far on the day. The stock is trading 16% higher than a recent low of $58 (the stock dipped at the end of June). On July 22, UPS announced earnings of 84 cents per share and beat estimates by seven cents. The company also raised guidance for its fiscal 2010 year. The market does not expect another earnings report until mid-October, which will also be the front month when the active options on the tape expire.

Around 11:59 a.m. EDT, roughly 7,000 October 57.5 puts changed hands versus current open interest of 3,600 contracts. Simultaneously, the same number of October 72.5 calls changed hands versus current open interest of 1,400 contracts. The October 57.5 puts crossed the tape for roughly 75 cents per contract and the October 72.5 calls traded for 33 cents per contract. The investor sold the puts and bought the calls to open a synthetic long stock (split strikes) position calling for further upside during the next three months. This trade produced a net credit of 42 cents per spread, which is the most amount of money this investor could make if the stock is trading between the strikes at expiration.

On the other hand, maximum profit is theoretically unlimited if the stock continues to the upside and rallies at least another 9%. If the stock drops lower than the put strike, the investor could lose money as the stock moves closer to zero. In this way, a synthetic long stock position is similar to a long stock position, but the investor ended up collected premium instead of paying roughly $66 per share to bet on upside.

This options trade also banks on implied volatility climbing to push up the stock. Implied volatility of the lower-strike puts is 38% while the higher-strike calls are trading with an implied volatility of 18%. The stock has a 30-day historical volatility of roughly 21%.

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


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

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