Package delivery concern United Parcel Service, Inc.
(NYSE:UPS) -- often viewed as an economic bellwether -- has followed the broader equities market lower today, and is on pace to end beneath its 10-day and 20-day moving averages for the first time in more than a month. Against this backdrop, it looks like a few option bears are cashing in their chips, while the bulls are gambling on a short-term rebound.
In early afternoon trading, UPS has already seen roughly 15,000 calls and 7,500 puts change hands -- more than three times its average intraday volume of fewer than 4,100 calls and 2,100 puts. The front-month January 2013 series of options is most popular on both sides of the tape, indicating accelerated short-term gambling.
On the bearish side, the January 2013 75-strike put is most active, with more than 1,700 contracts exchanged. The majority of the in-the-money puts have traded at the bid price, pointing to seller-driven volume. Or, in other words, it appears the 75-strike put holders are taking profits in the wake of UPS' decline.
On the bullish side, traders have shown an affinity for the January 2013 75- and 77.50-strike calls, which have each seen around 4,500 contracts cross the tape. A healthy portion of the calls traded at the ask price, and implied volatility was last seen higher at both strikes, hinting at buy-to-open activity.
By purchasing the calls to open, the speculators are expecting UPS to bounce back atop the strikes within the next few weeks. More specifically, the volume-weighted average price (VWAP) of the 75-strike calls is $0.61, meaning the buyers will make money if UPS conquers the $75.61 level (strike plus VWAP) within the options' lifetime. Meanwhile, the VWAP of the 77.50-strike calls is $0.10, indicating a breakeven level of $77.60 -- in territory not charted since July.
Widening our sentiment scope, we find that today's affinity for long calls marks a change of pace for UPS. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 1.28 registers in the 84th percentile of its annual range, suggesting option buyers have picked up puts over calls at a much faster-than-usual clip during the past couple of weeks.
In similar fashion, the security's Schaeffer's put/call open interest ratio (SOIR) -- which measures options expiring within three months -- stands at 0.84, just 14 percentage points from a 52-week peak. Or, in simpler terms, near-term options players are more put-skewed than usual right now.
As alluded to earlier, the shares of UPS are struggling on the charts, giving up 1.8% so far this week. Late last week, the stock ran into a wall at its formerly supportive 200-day moving average, and is in danger of ending beneath the aforementioned 10-day and 20-day trendlines for the first time since November 20.
This article by Andrea Kramer was originally published on Schaeffer's Investment Research.
Below, find some more great content from Schaeffer's Investment Research:
Daily Game Plan – Deal or No Deal
Dow Jones Industrial Average Looks to Break Losing Streak; Congress Reconvenes
Study of the Week: Why Buying Stocks Up 100% In ’12 Is a Good Strategy for ’13
No positions in stocks mentioned.