Income Trade in UPS

[Steven Place]

Very nasty couple of days for UPS. As it was heading into earnings, the stock was breaking to new all time highs… and then it got ugly. Today’s downgrade now has the stock in a steep correction.

So am I bullish here? Meh. This is more about being bearish volatility. The stock has a big fat range it’s headed into from the Aug-Nov price action, and the upside’s probably limited for a while.

I think that the stock is going to start working out some kind of a range.

What I want to do is “build out” an income trade. I’ll start with iron butterflies and as the stock moves I will roll the losing side out, thereby morphing the trade into an iron condor.

The reason I’m using butterflies instead of calendars is because the implied volatility is still quite hot in the stock, and I expect that to cool off here too.

Here’s the trade:

Sell to open UPS Mar 100/105 call spread for 1.85

Sell to open UPS Mar 100/95 put spread for 1.80

If we see a move to 97 or 103, we will roll the losing side further out via a “butterfly roll.” (Sounds like sushi. I could use some sushi right now…)

[Steven Place]

And for the past two months… UPS did nothing that required an adjustment. And it’s pinning 100.

This is what I’d call a “lotto ticket” outcome on an income trade. Great return on risk, but don’t expect this to happen every single time.

Buy to close UPS MAR 100/105 call spread @0.47

Buy to close UPS MAR 100/95 put spread @0.35

Can you try and milk it further? Sure, just have a range that if breached you bail on the trade.

Total return on risk is 215%.

[Author]

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