UPS, IRM Options – Unusual Trading Activity – January 4, 2013
This week we’re taking a look at unusual options trading activity in United Parcel Service (UPS) and Iron Mountain (IRM).
As many of you know, unusual options volume can be a valuable indicator as to what traders are thinking, and more importantly, where these stocks are heading in the short-term.
This is something professional options traders pay a lot of attention to, and for good reason…
Unusual options activity can “tip off” big moves in a stock, either up or down.
So let’s take a look at some ‘interesting’ activity that caught our eye this week:
United Parcel Service Options (UPS)
Option activity on the world’s largest package delivery company picked up this week. Traders are looking for significant upside in UPS during the first half of 2013.
After reaching a 52-week low of $69.50 in November, the stock has surged 10% to around $76.50 today. UPS is now less than 4% off the 52-week high of $79.92.
UPS has also been participating in the broad market rally to begin the year. The stock is up 3.5% in the first few trading days of 2013.
And option traders are expecting the rally to continue throughout the first half of the year. Yesterday, traders swapped 13,381 July 2013 $77.50 Calls at a cost of around $2.65 and $2.91.
The volume was a significant increase over the open interest on the strike of just 3,731 contracts, indicating new positions.
Assuming a purchase price of $2.75, traders need UPS to reach $80.25 by the time the options expire in July in order to break even. This represents a new 52-week high for the stock.
Is this a good trade?
I don’t think so… For one thing, the trade is a little too expensive for a speculative bet.
More than likely, these traders aren’t planning on holding these options through to expiration. They’ll be looking to sell these options long before they expire. And the purchase price of $2.75 severely limits the potential for a big percentage gain.
I’d rather go further out of the money to the $82.50 strike. These options can be purchased for around $1.00. They have the potential for much bigger percentage gains and the traders stand to lose much less if the trade moves against them.
I do like the bullish bet on UPS. It’s just the risk/reward on this option isn’t enough to get me to pull the trigger.
We’ll keep an eye on this one to see how it plays out.
Iron Mountain Options (IRM)
Call volume on Iron Mountain (IRM) surged to 15 times its daily average volume yesterday. The majority of the volume on IRM was in a single block trade of 3,000 call options.
Shares of IRM are currently trading for $32.97. The shares are up 21% since reaching a 52-week low in June. But are still well off the 52-week high of $37.70 they reached in October.
An option trader bought 3,000 of the January 2014 $32.50 calls for $2.75. They’re looking for IRM to continue moving higher throughout 2013. They’ll break even on the trade if IRM is trading 7% higher at $35.50 when the options expire next January.
Here’s the thing…
IRM just became a real estate investment trust (REIT). The special type of corporation provides tax advantages for businesses that make most of their money from income-producing real estate.
IRM fits the bill. They make most of their money from renting out storage space for medical providers to store patient records.
As part of the transition, IRM plans to distribute $1 billion to $1.5 billion of cash to shareholders. In fact, they already paid a special dividend of $700 million or about $4.05 per share last year. And the rest should be paid sometime in the next few months.
When IRM announced the last special dividend, the stock soared up to the 52-week high as traders positioned themselves to capture the special dividend.
This trader is hoping for a similar result this time around. They’re looking for a big run up in IRM’s share price ahead of the next special dividend payment.
This is a risky bet in my opinion. The market makers obviously know the special dividend is coming. And the option prices will reflect this.
While this may seem like a slam dunk, it’s more likely to blow up in the trader’s face. I don’t think the option will appreciate in value as the stock goes up ahead of the special dividend.
More Options Ideas…
That wraps up this week’s unusual options trading and volume…
Keep in mind, there’s a lot more unusual options activity going on than what we discuss here.
We just try to bring you what we feel are the most significant ones– and the ones you might actually be able to make some money on!
So keep an eye on your email inbox… we have a lot more options trading ideas coming your way!
Safe Trading,
Marcus Haber
Category: Unusual Options Trading Activity
