![FedEx (FDX) FedEx (FDX)](http://farm1.static.flickr.com/28/47697467_b023545845.jpg)
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.
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.
Photo Credit: @boetter
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