United Parcel Service (UPS, $63.48, down $2.78) came out this morning and said that 2Q earnings would be below expectations citing higher fuel prices and a sluggish U.S. economy. The company lowered earnings to $0.83-$0.88 a share for the quarter, down from a previous estimate of $0.97-$1.04.

This was hardly a surprise as the announcement comes less than a week after FedEx’s (FDX, $78.99, down $1.13) earnings miss. UPS said package volume is down and that demand for its higher-priced air delivery services have been hit harder than a Mike Tyson left hook. UPS could continue to pass higher fuel surcharges onto its customers to recoup higher fuels costs but that will not help the stock in the short-term. Oil was at $138 last I checked and shows no signs of breaking a higher trend.

I mentioned FedEx on 6/17 and 6/18 in the blog that the stock was nearing its 52-week low and could continue lower. The June 90 puts have since expired but provided a 100% return for some lucky option traders. I also profiled the July 80 puts (FDXSP, $3.14, up $0.59) at $1.59 and they have also pretty much doubled. If you are in the July puts, set stop at $2.75.

These are two great companies with great track records. However, all great stocks go through “cycles” and this one particular cycle is hammering FedEx and UPS right now. This is what makes the market so great if you know how to trade to the downside. Most people think if the market is going down that you can’t make money investing. Their big question and mystery is “how can you make money when a stock is going down?”. And you know what my answer always is? “By buying puts”.

These stocks will eventually rebound but it may take 6-12 months. In the meantime, enjoy the returns the puts are providing and keep raising your stops to protect your profits.

Rick Rouse