Name That Trade: $UPS’s Left Turn

by Dan July 29, 2014 3:21 pm • Commentary

UPS reported earnings this morning missed consensus estimates and guided down for the balance of the year, from the WSJ:

 the company said it now expects per-share earnings in a range of $4.90 to $5, down from its previous expectation of hitting the low end of its earlier forecast of $5.05 to $5.30 a share


The results indicated that the shipping service was still struggling to come to grips with consumers who are relying more on online marketplaces, which offer cheaper shipping, for products that come in larger, lighter and lower-density packaging.

As would be expected, the stock is down about 3% in line with the mid point of the company’s new guidance. The fundamentals are obviously in flux at the moment, and the results are in stark contrast to peer FDX.

The technical set up in UPS is downright awful, with the stock having just failed at the prior all time high made on the last day of 2013:

FDX ytd from Bloomberg
FDX ytd from Bloomberg

On a longer term basis, backing the chart out to the start of the latest leg of the rally equaling 50% from the November 2012 low to the Dec 31st, 2013 high, there could be evidence of an emerging breakdown.  The stock today broke the uptrend that has been in place since late 2012, and below the 200 day moving avg for the first time since then.

UPS 2 yr chart from Bloomberg
UPS 2 yr chart from Bloomberg

Options prices on UPS are fairly cheap, despite today’s decline.  30 day at the money implied vol recently popped into earnings, but failed to get close to the  levels it reached prior to Q1 earnings back in April, and now sits just a couple points above multi-year lows made last month:

UPS 3 year chart of 30 day at the money IV from Bloomberg
UPS 3 year chart of 30 day at the money IV from Bloomberg

Given that UPS is on the verge of breaking its long-term uptrend, options prices look too cheap to us, especially given that today’s large gap is partially due to increased business uncertainty going forward.

A big reason for the weakness in UPS stock relative to FDX over the past year is that investors expect much better earnings growth in FDX (25% vs. 13% per annum) as a result of its restructuring program.  Both companies have averaged 4% sales growth over the past few years, but analysts have modeled in 25% EPS growth for FDX due to the lower expense structure going forward (of course, whether that comes to pass for FDX still remains to be seen).  Both stocks look to be rolling over.

I want to make a bearish trade on what I feel is a significant technical break, but I don’t love pressing on a down 3.5% day.  I will look to do the following on a bounce back to its 200 day moving avg at $100:

Hypothetical Trade: UPS ($99) Buy to Open Sept 100/95/90 Put Butterfly for 1.50

Break-Even on Sept Expiration:

Profits:  btwn 98.50 and 91.50, make up to 3.5 with max gain of 3.50 at 95

Losses: up to 1.50 btwn 98.50 and 100 and btwn 90 and 91.50 with max loss of 1.50 above 100 and below 90

Rationale:  Vol is fairly low, but looking to off set decay in what could be a slow grind lower is attractive from a trading perspective. Also defining my risk in the event the stock has a reason to fill in the earnings gap is also attractive, stopping myself out at 1.5% of the underlying stock price and at a key technical level.

Stay tuned we will look to add place a trade on a failed attempt to break through $100 in the coming days.