FedEx (FDX) option trades for bulls and bears

FedEx FDX and its close rival United Parcel Service UPS have been popular names in the analyst world lately. Thursday, UBS upgraded its ratings on both companies to buy from neutral, noting that the recent pullbacks in both stocks have presented buying opportunities that may be “compelling for investors.” UBS sees solid fundamentals from both companies and has set price targets of $100 per share for FDX and $74 for UPS. Earlier in the week, Macquarie initiated coverage on UPS and FDX with respective ratings of outperform and neutral (and price targets of $70 and $85).

The pullback UBS was referencing has dropped FDX from a mid-April high of $97.75 to its current level just below $72 – a 26% drop in about two months. Along the way, the shares violated several trendlines of support and took out their early-February low. The stock is currently trading in territory not seen since early September and is perched on its 100-week moving average, at $70.81.

Although UBS analysts and others are limited to a three-point “buy-hold-sell” scale, option traders have a much wider variety of strategies to choose from. Two potential option trades in FedEx – one bullish, one bearish – are outlined below. Remember these are hypothetical examples, not recommendations. Consider your risk/reward parameters and trading goals before executing any new trades.

*Prices given as of Thursday afternoon. FDX was trading at $71.79.

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Bullish Option Strategy: Bull Call Spread

Think FDX will hold its ground from here? Consider an in-the-money bull call spread. The October 50/70 bull call spread is currently priced at $15.50 (buying the 50 strike, selling the 70 strike). If FDX is still trading above 70 when these options expire on October 15, the investor collects the maximum profit of $4.50. Between 70 and the breakeven price of $65.50, the spread will be somewhat profitable at expiration. The maximum loss, occurring at expiration if FDX is trading below the 50 strike, is simply 100% of the premium paid, or $15.50.

Profit/Loss of FedEx (FDX) bull call spread

Bearish Option Strategy: Long Put, Bear Call Spread

Investors beared up on the stock’s intermediate-term prospects could consider combining a long put and a bear call spread. By buying the January 60 put and shorting the January 75/95 call spread (selling the 75 call, buying the 95 call), the investor would collect a 65-cent credit. If FDX is trading anywhere between the 60 and 75 strikes at expiration, the 65-cent premium is kept as profit. Below 60, gains begin to accrue as the stock moves lower, capped only at $60.65 (if FDX were to plunge all the way to zero). Above the breakeven point of $75.65, losses begin to build until the 95 strike, where they are capped at $19.35, or the difference between the call strikes minus the premium collected.

Essentially, the premium collected for shorting the call spread helps finance the purchase of an out-of-the-money put in this scenario. This is a fairly bearish strategy, as it requires the stock to drop roughly 15% by expiration before gains really begin to appreciate. Delta for the three-legged position is currently around -57%, meaning the overall position should appreciate 57 cents for every dollar decline in FDX shares. The investor can opt close the trade at any time between execution and expiration.

Profit/Loss of FedEx (FDX) long put, short call spread