Despite the fact that United Parcel Service, Inc. (NYSE:UPS) is trading modestly lower in today's session, calls are outpacing puts. At last check, more than 7,500 calls had changed hands, compared to fewer than 5,500 puts. Nearly one-third of this call volume has centered at the January 2014 87.50-strike call, where 2,428 contracts have traded for a volume-weighted average price (VWAP) of $2.97. The majority of the positions have crossed at the ask price, implied volatility has ticked higher, and data from the International Securities Exchange (ISE) confirms that a number of contracts have been bought to open.
By purchasing the out-of-the-money LEAPS, traders expect UPS to topple the $87.50 mark by January expiration. More specifically, the calls will become profitable once the stock moves north of $90.47 (strike plus VWAP). Not only does this breakeven level represent expected upside of 6% to the equity's current perch at $85.33, but also uncharted territory. Delta for the call is docked at 0.42, or 42%, suggesting a roughly 2-in-5 chance the position will find its way into the money ahead of expiration. Should United Parcel Service fail to topple the strike price, the most the traders risk losing is the initial premium paid.
Today's trend toward calls marks a change of pace in UPS' options pits. At the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.97 ranks in the 75th percentile of its annual range. Simply stated, puts have been bought to open over calls at an accelerated clip in recent weeks.
A sort of indirect response. I've been suggesting that FDX will report a significant miss next week based on previous guidance and action steps (accelerated aircraft retirement, less profitable USPS airlift contract) as well as unrealistic analyst expectations. With FDX shares rising towards $99 today I would say that so far the market disagrees. I'd gladly accept being chastised via a good FDX report since it would bode well for UPS and validate the call action you've noted.
BTW, I see where UPS agreed to close the DEA invstigation with a $40M fine while FDX chooses to fight it. I wonder what their rationale is vs. our point of view? Clearly, FDX and UPS were advised of the issue and didn't take it seriously enough. We paid the price and so should FDX.