Profit from This Shipping Stock Always Doing the Same Thing After Earnings

United Parcel Service (UPS) reported earnings a couple of weeks ago, and just as traders did through the last earnings, they sold down into a gap. The stock is now in a range-based formation that we have seen through the last two earnings cycles.

Given that history is repeating itself, here’s how to trade UPS.

After breaking lower, the UPS chart has failed to hold above resistance levels through the last three earnings cycles, making it a pattern we can follow in the near term. Support sits near $105 and resistance sits near $120 after the last breakdown. 

We will sell an iron condor with the expectation of the same behavior through the next expiration cycle. 

A short iron condor consists of a short call spread and a short put spread combined to deliver higher income generation while the stock sits in a channel. 

When we position with short iron condors, we attempt to collect time decay while a chart bases or settles into a new direction. As always, we assume that we don't know the direction but are able to estimate the magnitude of the move using the ATR (average true range – measured on the weekly chart) and the implied moves that the market makers have priced into the move over the months ahead. 

• Sell to open 1 UPS 16 May 120 calls 
• Buy to open 1 UPS 16 May 125 calls 
• Sell to open 1 UPS 16 May 105 puts 
• Buy to open 1 UPS 16 May 100 puts 

At this writing the credit received is $2.52. This represents the maximum profit we will collect. With this kind of position, we collect a premium and as this premium erodes, we collect revenue from the position. 

Our maximum exposure is calculated the following way – the distance between the spread $5 less the collected premium $2.52 = $2.48 

Understanding the short iron condor spreads 

Traders often ask me why they should take a trade where the risk is often more than the size of the reward? The answer is this: the probability of the short iron condor with strikes far out of the money (meaning far away from the current price of the stock) returning gains is often as much as nine times more likely than the long iron condor.  

In the current case, this is what we are looking at – the probability that the short iron condor delivering gains is more than five times as likely. So, we make the trade on the side of probabilities, rather than the possibility of outsized gains. 

The strategy result provides three choices to exit the trade:

1. To buy back the short iron condor once it gets to an acceptable profit margin for you. I customarily look for 50% to 70% profit for these kinds of trades. 
2. To buy back the iron condor once it hits your loss threshold as determined by personal risk- this will happen with extreme movement. I customarily look at about 30% though depending on my size, I will choose 50%.
3. To hold the iron condor into expiration week before covering – this is a choice I would rarely recommend as prices can move quickly against you. 

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