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2 Shipping Stocks Presenting an Options Buying Bargain For the Holidays

Short-term options on FedEx Corporation (FDX) and United Parcel Service, Inc. (UPS) are pricing in low volatility expectations

Dec 9, 2016 at 12:30 PM
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The non-air transportation sector has been a strong performer lately, topping our internal Sector Scorecard, with 82% of its 27 components currently above their 80-day moving averages. In fact, the Dow Jones Transportation Average (DJT) hit a fresh record high at 9,490.29 today, and is currently up more than 25% in 2016, while the corresponding iShares Transportation Average ETF (IYT) also tapped an all-time peak this morning, at $171.16, and has brought its 2016 lead to more than 26%. Meanwhile, IYT's top two holdings, FedEx Corporation (NYSE:FDX) and United Parcel Service, Inc. (NYSE:UPS), seem to present attractive opportunities for near-term options buyers.

FDX has added nearly 32% so far this year, rallying hard through the month of November, and hitting a record high of $197.30 on Thursday. But there could be trouble ahead for the stock. After all, FDX has been among the worst performers in December over the last 10 years, losing 2.6% on average, and ending the month positive only 40% of the time. What's more, the stock's 14-day Relative Strength Index (RSI) of 75 is well into overbought territory, suggesting a breather may be due. The shares are pulling back slightly today, last seen off 0.5% at $196.17.

Analysts seem to be fairly upbeat toward FDX, with nine out of 15 rating the shares a "strong buy," and not a single "sell" opinion on the books. But traders appear more skeptical. While short interest represents just 1.8% of FDX's total float, these bearish bets climbed by 22.2% during the most recent reporting period. Options traders have been unusually put-heavy toward the stock, too, particularly among options in the front three-months' series. Specifically, FDX holds a Schaeffer's put/call open interest ratio (SOIR) of 2.77 -- an annual high.

But whether it's puts or call, short-term options buyers could be getting a deal. FDX's Schaeffer's Volatility Index (SVI) of 22% sits within the bottom third of all readings from the past year, indicating the stock's near-term options are pricing in dampened volatility expectation right now. At the same time, the Schaeffer's Volatility Scorecard (SVS) of 96 suggests the options market has seriously underpriced FedEx Corporation's (NYSE:FDX) ability to make big moves on the charts over the last 52 weeks.

Turning to UPS, the stock has a similar technical setup to its peer, adding 24% in 2016. The equity is up 0.2% at $119.25 today, and earlier notched a fresh record high at $119.40. However, its 14-day RSI of 79.6 suggests UPS could soon be due for a break.

Analysts appear more pessimistic toward UPS, with 60% rating the shares a "hold" or a "strong sell." And short sellers have been piling on in recent weeks. Specifically, short interest on the stock popped nearly 36% during the most recent reporting period, and the 2.3% of UPS' total float that's shorted would take almost a week to cover, at the stock's typical pace of trading.

On the flip side, options traders are nearing optimistic extremes. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security's 10-day call/put volume ratio of 3.21 ranks in the bullishly skewed 96th percentile of its 12-month range. And near-term options buyers could also be getting a bargain on United Parcel Service, Inc. (NYSE:UPS), with its SVI of 14% seated in the low 16th percentile of its annual range, and its SVS parked at a healthy 73.

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