UPS Option Trader Bets $3M The Stock's Huge Rally Isn't Over

United Parcel Service, Inc. UPS shares are up 70.4% in the past three months. The delivery giant appears to have gotten a boost from shelter-in-home environment, and at least one large option trader is making a huge bet on more upside ahead.

The UPS Trades: On Monday, Benzinga Pro subscribers received two option alerts related to unusually large UPS trades:

• At 9:39 a.m., a trader bought 346 UPS call options with a $162.50 strike price expiring on Friday above the ask price at 88.3 cents. The trade represented a $3,055.18 bullish bet.
• At 12:05 p.m, a trader bought 750 UPS call options with a $120 strike price expiring on Jan. 15 2021 at the ask price of $42.25. The trade represented a more than $3.16 million bullish bet.

Why It’s Important: Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large size of Monday’s largest UPS option trade, it could certainly be institutional hedging.

Delivering The Gains: UPS shares traded higher on Monday without any major news from the company. UPS been on fire in recent months, as the combination of low fuel prices and soaring delivery demand propelled the company to a huge second-quarter earnings beat.

UPS reported a 20.9% jump in overall volumes, including a 22.8% gain in domestic volumes and a 65% increase in business-to-consumer deliveries in the quarter.

Looking ahead to the third quarter, there’s no obvious reason to think there will be a significant change in customers’ behavior given the COVID-19 outbreak is ongoing. In the longer-term, UPS investors may be speculating that some of the pandemic related shifts in shopping behavior may stick even after the worst of the pandemic subsides, creating a better baseline environment for UPS.

Benzinga’s Take: The fact that the January calls expire more than five months from now suggests the trader isn’t making a play on near-term bullish momentum or even third-quarter earnings. The trader may simply be betting that the shelter-in-place environment drives a massive amount of holiday season shopping online, creating a late-year surge in UPS deliveries.

The January calls have a break-even price of $162.25, suggesting the stock needs to gain only about 0.4% over the next five months for the trader to turn a profit on the calls.

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