In the ever-evolving world of stocks and investments, recognizing critical signals is imperative for traders. The recent downturn in United Parcel Service's relative strength has emerged as one such signal, raising concerns among investors.
UPS stock is down 10% in the last month, undercutting its May and June lows. Today, we're looking at a high-return, low-risk bearish option trade.
A bear put spread is a debit spread. That means we need to pay the premium to open the trade.
On UPS, a bear put spread could be set up using the 150 strike as the long put and the 145 strike as the short put for the Oct. 20 expiration.
Max Potential Gain $450
This trade would cost around $50 per contract with a maximum potential gain of $450.
To achieve the maximum profit, this trade would need UPS stock to drop a further 10% between now and expiration on Oct. 20.
While this trade doesn't risk much capital, there is a fairly low chance of success. That's because a large bearish move is needed in a short space of time.
The break-even point for the bear put spread is 149.50. That's calculated as 150 less the $0.50 option premium per contract.
If UPS stock drops early in the trade, it may be possible to make a profit at slightly higher prices.
Trade Wiped Out If UPS Stock Goes Above 150
At expiration, if UPS is trading above 150, the entire spread would expire worthless. The trade would lose 100%, or $50.
For a trade like this, I wouldn't bother with a stop loss. Either the trade works or it doesn't. So I would trade an appropriate position size in case I suffered the full 100% loss.
Because this is a bearish position, traders who think UPS stock could move higher from here should not enter this trade.
According to the IBD Stock Checkup, UPS stock is ranked No. 3 in its industry group and has a Composite Rating of 42, an EPS Rating of 68 and a Relative Strength Rating of 28.
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Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
