UPS – United Parcel Service, Inc. – Shares of the provider of services in the package and freight delivery industry jumped 7.15% to an intraday high of $64.31 following the release of better-than-expected second-quarter earnings. The world’s largest package-delivery company earned $0.84 a share in the second quarter, which is greater than the consensus forecast of $0.75 a share, and also raised its full-year earnings estimate to a maximum of $3.45 a share from a previously reported maximum of $3.30 per share. Bulls anticipating continued upward movement in the price of the underlying shares through expiration day next month purchased roughly 2,100 calls at the August $65 strike for an average premium of $0.99 per contract. Investors long the calls make money if shares exceed the average breakeven price of $65.99 by August expiration. Medium-term optimists scooped up 1,700 calls at the October $67.5 strike for an average premium of $1.07 apiece. Shares of the package-deliverer must rally at least another 6.6% in order for call buyers at this strike to start to accrue profits above the average breakeven point of $68.57 by October expiration. Put action at the October $52.5 strike, where more than 6,000 contracts changed hands, appears to be the work of an investor taking profits off the table by buying-to-close a previously established short put stance. It looks like the trader originally sold 6,000 puts at the October $52.5 strike to receive premium of $1.28 per contract back on July 12, 2010, when UPS shares traded at an intraday high of $60.50. The subsequent surge in the value of the shares pushed premium on the puts significantly lower. Thus, it seems the put-seller bought back the contracts today at an average premium of $0.59 each. In this scenario, the trader walks away with net profits of $0.69 per contract. The overall reading of options implied volatility on the stock declined 16.7% to 23.40% following earnings.
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Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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