Why the risk/reward didn't align for a UPS put trade
Our traders are stalking a lot of different stocks throughout the week, but not every potential trade idea develops into a formal recommendation to our subscribers. Whether it's the break of a key technical level for the shares, an unexpected news announcement, or an unfavorable options pricing environment, this regular feature will shed some light on the factors we view as "deal breakers" to otherwise intriguing trade setups. Today, Schaeffer's Senior Trading Analyst Bryan Sapp chimed in on one stock he was toying with -- but ultimately rejected -- for a bearish options recommendation recently: package delivery specialist
United Parcel Service, Inc. (NYSE:UPS).
What He Liked About a UPS Put Trade
Specifically, UPS caught Sapp's eye after a big recent
earnings miss and subsequently weak price action. The shares are down more than 5% year-to-date, despite broad-market strength. Recently, they've rallied back into the "gap zone" near $108.50, which "could act as potential resistance, as could the overhead 200-day moving average." Further, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.51 is higher than just 7% of all other readings from the past year, pointing to a bigger-than-usual call bias among near-term options traders -- intriguing from an
Expectational Analysis point of view.
Why He Backed Out of a Bearish Bet
However, there were five reasons Sapp ultimately chose not to recommend UPS put options:
- It's a tough environment to trade puts. "There's no sense in getting overly bearish with the S&P 500 Index (SPX) seemingly making new all-time highs every single day."
- Analysts remain somewhat skeptical toward UPS, so there’s the potential for an upgrade to work against you.
- The stock retook the $106 area, which was support since mid-2016. "May be tough to break back below there without news or broad-market weakness," he said.
- The shares could easily rally back near $110-$112, "at which point you'd have a tough decision to make with regard to position management." There's also an open gap above, and oftentimes stocks will completely fill their earnings gap. "It’s just too big of a potential up move, given there’s significant support below at $106, $103, and $100," he explained. "Risk/reward just doesn't align for me."
- The stock goes ex-dividend this week. "I generally try and avoid these situations when trading options, because they get priced in to the premium, and ex-div days can be very unpredictable."
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