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United Parcel Service (UPS) stock has been a serial underperformer this year with the stock down 20% this year and 40% over the last three years.
UPS shares have faced significant headwinds in recent times, weighed down by multiple challenges impacting the transport giant's bottom line.
The company's new Teamsters contract has substantially increased labor costs, putting pressure on profit margins at a time when delivery volumes are already declining due to the post-pandemic normalization of e-commerce activity.
Adding to these concerns, Amazon's growing in-house delivery network poses a strategic threat to UPS, as the e-commerce leader continues to reduce its reliance on third-party shipping partners.
These fundamental challenges have created bearish sentiment around UPS stock, suggesting potential downside risk in the near term.
As investors digest these headwinds, options strategies could offer a way to capitalize on potential weakness in the stock.
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 February 21 call with a strike price of $140 and buying the $145 call would create a Bear Call spread.
This spread was trading on Friday for around $0.55. That means a trader selling this spread would receive $55 in option premium and would have a maximum risk of $445.
That represents a 12.4% return on risk between now and February 21 if UPS stock remains below $140.
If UPS stock closes above $145 on the expiration date the trade loses the full $445.
The breakeven point for the Bear Call spread is $140.55 which is calculated as $140 plus the $0.55 option premium per contract.
UPS OPTIONS FLOW
Options flow was negative for UPS stock on Friday, despite the stock rallying 2.47%.
Thursday also had net trade sentiment of -$870,700.
COMPANY DETAILS
The Barchart Technical Opinion rating is an 88% Sell with a strengthening short-term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
The market is approaching oversold territory. Be watchful of a trend reversal.
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 $55, so we could set a stop loss equal to the premium received, or a loss of around $55.
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.
