Did Santa just come to options town?

Summer’s barely over, yet it’s beginning to look a lot like Christmas for some folks on Wall Street.

The good ole days of crowding malls before the holidays may have passed as e-commerce eviscerates traditional retail. But on Monday, options traders looked to get their Yuletide jollies in an outfit that’s helping write the epitaph for brick-and-mortar merchants. We’re talking Amazon.com (NASDAQ: AMZN) right? Not today—we’re talking its key shipping partner United Parcel Service (NYSE: UPS).

Going to work less than an hour after the opening bell, an investor purchased a block of 20,000 January 2020 140 calls in UPS for $3.20. They also sold 20,000 January 2020 160 calls for $0.70. Here’s what it seems to mean:

  • Owning calls fixes the price where a security can be bought, while writing them creates an obligation to deliver shares if a certain level is reached. 
  • Combining the two is known as a vertical spread, using income from selling one to help pay for the other. In the case of yesterday’s trade, it lowered the cost to $2.50, or $3.20 - $0.70. 
  • They now stand to collect $20 if UPS closes at $160 or higher on expiration. That’s a potential profit of 700 percent from a 37 gain in the underlying shares. Breakeven’s at $122.50, and the entire position will go worthless if the stock remains below $120.
  • UPS ended the session up 0.47 percent to $118.22.

The timeframe on this trade also had some folks buzzing because it reaches all the way out to 2020.  Yes you read that right—the start of next decade. Someone’s willing to wait a few years for Santa to come down the chimney.

United Parcel (UPS) 3/31/17 - 9/25/17 chart

Source: OptionsHouse by E*TRADE.

Others think the elves might deliver sooner. Analysts see rising volumes as the holidays approach, while e-commerce software coders are already predicting a record Black Friday.1 Shipping rates are also climbing–especially as post-hurricane construction projects gobble up space on trucks.2 Add to that a labor market that won’t say die, better-than-expected industrial manufacturing, and a healthy global economy.3

All of that adds to the cheer in transports, sector watchers might add. They’ve known the Dow Jones Transportation Index has delivered triple the performance of the S&P 500 in the last month. They also see signs of money rotating out of technology and into more traditional cyclical stocks as the economy improves.

Technicians also had something to say. After all, didn’t UPS drop on weak guidance the last time it announced results,4 but then hold its 50-day moving average and run back toward its old highs? Doesn’t that kind of price action reflect underlying demand for the shares? Secondly, didn’t that same 50-day MA rise through the 200-day MA around the same time? Didn’t we learn in Charting 101 that’s a “golden cross” reflecting a positive turn in long-term momentum?

By the time the dust settled, total option volume in UPS was more than quadruple its average in the last month. Calls outnumbered puts by a bullish 25-to-1 ratio.

Bottom line: UPS has been on the move since the summer, and some traders think it will keep delivering over the long run.


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1. MT Newswires: Oppenheimer Raises United Parcel Service's PT on Volume Momentum in Int'l Deliveries; Rating at Outperform. 9/20/17. Marketwatch: Salesforce says Black Friday will be busiest online shopping day in U.S. history. 9/25/17.

2. Reuters: FedEx to raise shipping rates for some services. 9/18/17. JOC.com: Freight recovery from Irma to last months, spike truck rates. 9/8/17. 

3. RTTNews: Philly Fed Index Unexpectedly Indicates Faster Growth In September. 9/21/17. CNBC: US weekly jobless claims fall 23K to 259,000, below expectations of 300K. 9/21/17. Reuters: ECB's Draghi warns against hasty policy moves. 9/25/17.

4. Reuters: U.S. ecommerce, price hikes lift UPS profit but shares fall on outlook. 7/27/17.