United Parcel Service got punished in recent months as it drifted below its 10- and 40-week moving averages. But the selling in UPS stock seems to have stopped where it bottomed a year ago, at around 150. If UPS stock can make a stand here, the unbalanced iron condor has a slightly bullish bias for profits.
The Unbalanced Iron Condor
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread. Both spreads produce a credit and create an ideal range for the stock to trade between in order to keep the credit.
The unbalanced iron condor simply changes the symmetry. In the case of UPS stock, we'll trade more put spreads than call spreads to make the trade lean slightly bullish. We'll collect more premium as a result but also open ourselves up to more risk on the downside.
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For this trade on UPS stock, let's start with the two bull put spreads:
- Sell to open two UPS Jan. 19 puts with a strike price of 135, which traded recently around 2.05.
- Buy to open two UPS Jan. 19 puts with a strike price of 130, which traded recently around 1.40.
Then we'll add in the single bear call spread:
- Sell to open one UPS Jan. 19 call with a strike price of 180, which traded recently around 95 cents.
- Buy to open one UPS Jan. 19 call with a strike price of 185, which traded recently around 55 cents.
The bull put spread brings in a credit of 65 cents each (remember we are buying two). The bear call spread brings in a credit of 40 cents. The total credit is 1.70, or $170 since each contract is for 100 shares.
Managing The Trade On UPS Stock
The profit zones for the UPS stock unbalanced iron condor range from 133.30 to 181.70. You calculated these by taking the short strikes and adding or subtracting the premium received.
The maximum risk is $830 on the put side if UPS stock trades below 130 at expiration. If UPS stock shoots up past 185 at expiration, you'll take a smaller loss at $330 on the call side. More put spreads mean more downside risk.
Of course, the ideal situation is for UPS stock to stay between the short strikes of 180 and 135 at expiration. In that case, you keep the entire premium.
Since you are risking $830 for a potential return of $170, this trade has a 20% return on risk.
A stop loss in this case might be calculated based on 25% of capital at risk — so a loss of around $210. Earnings are scheduled for Oct. 26 before the market open, so this trade does have earnings risk.
According to the IBD Stock Checkup, UPS stock ranks No. 3 in its group. It has a fairly meager Composite Rating of 45, an EPS Rating of 68 and a Relative Strength Rating of 26.
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
