Playing A Bullish UPS Outlook Using Options
Based On Bullish Barron's Article From This Weekend
When I was growing up in Memphis, TN I had a fascination with the financial markets that led me to ask for a Barron’s subscription for Christmas when I was in high school. Santa did not deliver on that one, so each week I would take a stack of quarters and purchase a copy from a machine about a mile from my house. I would track Barron’s recommendations and eventually used those recommendations to develop (on paper) option strategies. I still do this, but Barron’s is on my driveway each Saturday morning. One of the ideas behind writing in this space is to share option strategies based on stock recommendations in Barron’s that I find attractive.
This past weekend, there was a compelling bullish argument in Barron’s for shares of United Parcel Service (UPS). A target price of $175 a share was noted in the article, so I am working with that level and assuming the stock can hit that level by early 2025.
In early trading on Monday shares of UPS were at 149.75. For the long leg of my spread, I decided on the Jan 2025 120 Calls which could be purchased for $35.00. The break-even for this is 155.00, which gives this option the appearance of being cheap, however, UPS has a dividend yield of over 4% and will likely pay about $4.90 in dividends (three quarterly dividends) between today and January 2025 expiration, which will put pressure on the shares. One of the downsides of using long-term options is you do not receive dividends, but you should still be aware of dividends when looking at purchasing a longer dated option contract.
One of my favorite methods of taking a long-term position in the option market is to buy a long-dated call or put (based on the directional outlook) and then sell near dated out-of-the money options. To offset some of the January 2025 120 Call’s time value, I sold the Mar 28th 155 Call at 2.00 which results in a cost of 33.00 and break-even of 153.00. The payoff below is based on holding the Mar 28th 155 Call to expiration.
The best-case scenario on March 28 expiration is for UPS to be just under the 155-strike price. However, the plan for this trade is to trade around shorter dated short calls, either covering on weakness or making certain I am not assigned on the short call position which is mostly a danger around dividends. It appears that will not be a concern until May. Any managing trades will be posted in this space.