United Parcel Service (UPS) is currently showing above average volatility with an IV Percentile of 87% and an IV Rank of 53%.
UPS rates as a Strong Buy according to 10 analysts with 12 Hold and 1 Strong Sell ratings.
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.
Today, we’re going to look at a short strangle trade due to the high IV percentile.
A short strangle aims to profit from a drop in implied volatility, with the stock staying within an expected range.
When implied volatility is high, the wider the expected range becomes.
The maximum profit for a short strangle is limited to the premium received while the maximum potential loss is unlimited. For this reason, the strategy is not suitable for beginners.
UPS SHORT STRANGLE
Traders that think UPS stock might remain stable over the next few weeks could look at a short strangle.
As a reminder, a short strangle is a combination of an out-of-the-money short put and an out-of-the-money short call.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
For UPS stock, a February 16 put with a strike price of $140 could be sold for around $1.15.
Then the short call, placed at the $175 strike, could be sold yesterday for around $1.20.
In total, the short strangle will generate around $2.35 per contract or $235 of premium.
The profit zone ranges between $138.65 and $176.35. This can be calculated by taking the short strikes and adding or subtracting the premium received.
If price action stabilizes, then short strangles will work well. However, if UPS stock makes a bigger than expected move, the trade will suffer losses.
Conclusion And Risk Management
One way to set a stop loss for a short strangle is based on the premium received. In this case, we received $235, so we could set a stop loss equal to the premium received, or a loss of around $235.
Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around $145 on the downside and $170 on the upside.
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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
