United Parcel Service (UPS) stock has been making deliveries on Struggle Street recently with the stock down 18% this year and 38% over the last two years.
The Barchart Technical Opinion rating is an 88% Sell with a strengthening short-term outlook on maintaining the current direction.
Today, we’re going to look at a Bear Call spread trade.
A Bear Call spread is a bearish trade that also can benefit from a drop in implied volatility.
The maximum profit for a Bear Call spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
UPS BEAR CALL SPREAD
To create a Bear Call spread, we sell an out-of-the-money call and then by another call further out-of-the-money.
Selling the November 15 call with a strike price of $145 and buying the $155 call would create a Bear Call spread.
This spread was trading yesterday for around $0.95. That means a trader selling this spread would receive $95 in option premium and would have a maximum risk of $905.
That represents a 10.5% return on risk between now and November 15 if UPS stock remains below $145.
If UPS stock closes above $155 on the expiration date the trade loses the full $905.
The breakeven point for the Bear Call spread is $145.95 which is calculated as $145 plus the $0.95 option premium per contract.
COMPANY DETAILS
United Parcel Service is the world's largest express carrier and package delivery company. The company provides specialized transportation and logistics services in the United States and internationally. UPS offers a range of supply chain solutions, such as, freight forwarding, customs brokerage, fulfillment, returns, financial transactions, and repairs.
UPS transports millions of packages each business day across the globe. UPS operates a ground fleet of multiple vehicles in the United States.
The company has a ground fleet of package cars, vans, tractors and motorcycles across the globe.
The U.S. domestic package operations involve ground delivery services, deferred air delivery, and next day air services.
Opeartions include the time-definited delivery of letters, documents and packages throughout the country.
The International package operations encompass delivery of letters, documents and packages worldwide, including shipments outside the U.S.
United Parcel Service is showing an IV Percentile of 39% and an IV Rank of 37.09%.
United Parcel Service is due to report earnings in late October, so this trade would have earnings risk if held to expiration.
Conclusion And Risk Management
One way to set a stop loss for a Bear Call spread is based on the premium received. In this case, we received $95, so we could set a stop loss equal to the premium received, or a loss of around $95.
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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
