Considering Our Options – $UPS Put Butterfly

by Enis August 15, 2014 1:42 pm • Commentary

Dan put on a bearish UPS trade at the end of July after the company’s weak earnings report.  This was the trade (full post here):

Trade: UPS ($99.45) Bought to Open Sept 100/95/90 Put Butterfly for 1.45

Since then, UPS has underperformed the broader market, selling off to $95 and stalling even as the market bounced in the past week:

UPS daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg
UPS daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

The 2014 low in UPS is $93.19, marked in green.  As long as that level holds, the likelihood of UPS hanging near the $95 short strike of the butterfly remains quite high (especially since the stock hardly bounced this week, suggesting little upside risk to near $100 in the near-term).

The Sept 100/95/90 put butterfly position is currently worth about $2.20, vs. the initial cost of $1.45.  The appreciation has mostly been due to the stock’s directional move lower down to the midpoint of the butterfly, which is the sweet spot on expiration.  Going forward, however, the trade now does not have much delta here, so the structure will not appreciate based on direction.  Rather, the main variable is now volatility, since the butterfly will appreciate through time decay if UPS remains near $95.  The current time decay of the position is about 1.5 cents per day, though that will increase as we get closer to expiration.

With the butterfly worth $2.20 at the moment, the trade would appreciate between now and Sept expiration if UPS ends between $92.20 and $97.80.  That gives you a sense for the time value still remaining in the trade.  With that in mind, we plan to hold on to this trade as long as the intrinsic value of the position (currently around $3.70 with UPS at $96.30) is greater than the current market value (currently $2.20).  If that changes (which is not likely as long as UPS remains between $93 and $97), we might consider closing the position to conserve our profits.