During Thursday’s market meltdown, one analyst still had time for optimistic words on United Parcel Service UPS and FedEx Corporation FDX. David Ross of Stifel Nicolaus boosted his rating on both names to “buy,” noting the shipping industry has room for upside as the global economy recovers. Ross was a bit more cautious on FDX, noting that it might have some near-term challenges to overcome.
Technically speaking, FDX has pulled back of late (along with the rest of the market) but is resting above its 50-week moving average. This trendline is sitting near the $80 level, which was also the site of the stock’s early February low. Stock traders who are interested in either side of the FDX trade but who don’t want to assume the risk of a short sale (or pay $8,000 for 100 shares) could consider option trading strategies. Two hypothetical options trades on the stock – one moderately bullish, one neutral – are described below. Remember these are merely examples, not recommendations. Consider your own risk/reward parameters and personal trading goals before executing any new trades.*Prices given as of Friday morning. FDX is trading $81.10
Moderately Bullish Option Strategy: Bull Put Spread
With volatilities exploding of late, a premium-selling strategy seems like a reasonable choice. FedEx bulls could consider selling the October 80/75 bull put spread (selling the 80 put, buying the 75 put) for $2.00 per spread. If FDX is trading above $80 when the options expire, the spread seller keeps this credit as profit. Maximum loss is capped at $3.00, or the difference in strikes minus the credit (return on risk is 66%). Breakeven for this spread is $78.00 at expiration; if FDX is trading anywhere above this level, the spread trade is profitable.
For this strategy, FDX does not have to move higher, it just has to stay above $80. This is why it is considered moderately bullish. A more aggressive bull put spread might employ in-the-money puts.
Neutral Option Strategy: Iron Butterfly
Investors who believe volatility will drop in FDX shares might look at an iron butterfly strategy. This four-legged strategy, which involves a short straddle and a long strangle, is typically used by more advanced traders who expect limited movement in the underlying. Currently, a July-dated iron butterfly can be traded by executing the following trades:
• Short the July 80 straddle (by shorting the July 80 call and the July 80 put) for a net credit of $11.85
• Go long the July 70/90 strangle (by buying the July 70 put and the July 90 call) for a net debit of $4.65
• Total credit for the four-legged trade is $7.20
Maximum profit of the entire credit ($7.20) occurs if FDX is trading right at the 80 strike when the options expire. This butterfly is slightly bearish in nature as it would take a 1.3% drop in the stock to achieve maximum profit. Maximum loss, occurring if the stock is below 70 or above 90, is just $2.80, or the difference between the short and long puts (or calls) minus the credit. Reward on risk, therefore, is 257%. Breakevens for this iron butterfly strategy are $72.80 to the downside and $87.20 to the upside.
What’s Your FedEx Prognosis?
Will FedEx rebound from technical support, breach it to the downside, or trend sideways for the foreseeable future? Every trader has his or her own opinion … we’d love to hear yours.
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