Different people react to earnings season differently. Some experience a quickening of pulse, a shortness of breath. Others keep an earnings scorecard next to their keyboards, gleefully recording the beats and misses. And still others look ahead, predict who will disappoint, and put on bearish trades. Friday's episode would put the "Options Action" traders in that third camp. Let's get to the bear calls on United Parcel Service and Amazon.
Let's start with the trade on UPS . Oppenheimer's Carter Worth looked at a few charts of United Parcel Service, and hated what he saw. Worth predicted that the stock is set for a drop to $65.
CRT Capital's Mike Khouw agreed with the bearishness, pointing out that all recent the data point toward weakness for the transportation sector. Despite this, UPS still looks quite expensive — Khouw pointed out that the stock trades at a premium to the market, even though that the company is not growing with any great speed.
So to express his bearish thesis, Khouw recommended buying a put ahead of earnings. Specifically, he wanted to buy the November 70-strike put for $0.85.
And he wasn't the only one — as of noon on Monday, that put had by far the highest volume of any UPS call or put of any expiry.
Khouw's hot trade and breakdown follow.
MIKE'S UPS TRADE
• BUY NOVEMBER 70-STRIKE PUT FOR $0.85
HOW MIKE'S UPS TRADE MAKES MONEY
• LOSSES ABOVE $69.15
• PROFITS BELOW $69.15
On to the Amazon trade. RiskReversal.com's Dan Nathan pointed out that many of the "high flyers" have gotten their wings clipped recently, and Amazon could be the next one to experience a move to the downside. Google got badly hurt after reporting disappointing earnings, and Amazon could be the next in line.
Given his bearish sentiments, Nathan recommended buying the November 230/210 put spread for $5. His trade and breakdown:
DAN'S AMAZON TRADE
• BUY THE NOVEMBER 230-STRIKE PUT FOR 7.70
• SELL THE NOVEMBER 210-STRIKE PUT FOR 2.70
HOW DAN'S AMAZON TRADE MAKES MONEY
• LOSSES ABOVE $225
• PROFITS BETWEEN $225 AND $210
• PROFITS CAPPED AT $210
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