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UPS Call Volume Accelerates as Stock Approaches Familiar Hurdle

Speculators employed calls to bet both bullishly and bearishly on UPS

by 7/6/2012 10:29 AM
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Delivery diva United Parcel Service, Inc. (NYSE:UPS - 79.77) is on pace for a weekly gain of about 1.4%, despite ticking lower with the broad market this morning. As such, the stock -- within striking distance of new-high territory -- has been popular among call traders recently, as evidenced by data from the major exchanges.

Specifically, the equity has racked up a 10-day call/put volume ratio of 2.22 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), indicating that traders have bought to open more than two UPS calls for every put during the past two weeks. What's more, this ratio stands higher than 70% of all others taken during the past year, pointing to a healthier-than-usual appetite for bullish bets of late.

Echoing this trend, UPS saw about 15,000 calls cross the tape yesterday -- more than twice its average daily call volume, and about four times the number of UPS puts exchanged. Attracting notable attention was the out-of-the-money October 90 call, which saw close to 1,500 contracts change hands. What's more, all of the calls traded at the ask price, and nearly all of the volume translated into new open interest overnight. By purchasing the calls to open, the buyers are betting on UPS to surmount the $90 level -- a feat not yet accomplished by the stock -- within the next few months.

On the flip side, it looks like some speculators employed shorter-term calls to bet on resistance for UPS. Specifically, the out-of-the-money August 82.50 strike saw close to 2,500 contracts cross the tape -- mostly at the bid price, hinting at seller-driven volume. Plus, call open interest at the back-month strike ballooned overnight, confirming our theory of fresh initiations. By writing the calls to open, the sellers are expecting UPS to remain south of $82.50 throughout the options' lifetime. In this instance, the calls will expire worthless and the traders can pocket the initial premium received.

Technically speaking, there's a good chance those 82.50-strike call sellers are hoping for the $80-$82 region to hold as resistance. This area rejected UPS' rally attempts earlier this year, and halted the stock's advances in 2005-2007. What's more, the July 80 strike is home to peak call open interest, with more than 25,000 contracts in residence. In the short term, this abundance of bullish bets could translate into an options-related headwind for UPS.

Monthly Chart of UPS since November 2005


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