The holiday season has begun! Consumers everywhere are doing their part to stimulate the economy, and more and more holiday shopping these days is being done online. Some of the beneficiaries of this activity (other than the recipients of said gifts) are the major shipping companies, namely UPS UPS and FedEx FDX.
When Amazon.com AMZN and other retailers send things across the world, they obviously employ someone to do the legwork. And that's not to mention all the shipping people will do to out-of-town family and friends. If “Black Friday” and “Cyber Monday” retail numbers are any indication, consumers are shopping more than they did last year. That means they'll be shipping more too, and FedEx is a proxy for the shipping business as a whole.
Of course, there is the contrarian take on this philosophy; if investors already expect the company to benefit from the holiday season, they may ultimately be let down. This is also known as “buy the rumor, sell the news.” FDX has run up almost 17% in the past six months and has modestly outperformed the broader market in 2010. Earlier this week, Credit Suisse upgraded its rating on the stock to outperform from neutral, reflecting a more optimistic outlook.
For both FedEx bulls and bears, we've outlined option strategies below that might be an alternative to simply going long or shorting the stock. These strategies are for demonstrative purposes only and are not trading recommendations. All prices are as of Thursday midday, when FDX shares were trading at $95.52, up $1.53 on the day.
Bullish Option Strategy: Stock-Replacement Strategy
As one way to express a bullish outlook in FedEx, investors could simply buy a short-dated long call. This investing alternative is also known as the “stock-replacement” strategy. Instead of going long the stock for roughly $9,500 (for 100 shares), a trader could scoop up the January 85 call for $11.55 ($1,155 per lot).
If FDX rallies above the breakeven price of $96.55 (strike plus premium paid) by expiration on January 21, gains are theoretically unlimited to the upside. This breakeven price is only $1.03 cents higher than the stock's current price. The maximum loss is capped at the premium paid, should FDX drop below the 85 strike before expiration. A long stock holder has downside exposure all the way to zero.
The delta on this call is currently 85. For every $1 the stock rallies, the call will theoretically gain 85 cents. Conversely, the call will lose 85 cents for each $1 the stock declines. Delta is a fluid variable, however, and is affected by changes in volatility and time until expiration (in addition to changes in the underlying's price).
The profit/loss chart below illustrates how gains are unlimited to the upside while flatten below the 85 strike. The OptionsHouse platform makes this and other tools available for all customers who open a virtual options trading account.
Bearish Option Strategy: Put Butterfly
Investors with a bearish outlook in FedEx could consider a put butterfly as a potential strategy. The January 70-80-90 put butterfly spread can be purchased for a net debit of $1.16 (buying one 70 put, selling two 80 puts, and buying one 90 put simultaneously).
If the shares are trading right at the short strike (80) at expiration, profit is the difference between the higher-strike long put strike and the short strike ($10) less the debit paid, or $8.84 in total. Losses are capped at the premium paid ($1.16) to the upside above the 90 strike and to the downside below $70. Return on risk is potentially more than 750% but FDX needs to fall more than 15% from its current price to hit the 80 mark.
Breakevens for this strategy are $71.16 and $88.84, or the higher-strike long put less the premium paid and the short put strike less the maximum profit. If FedEx is trading anywhere between these levels when the options expire, the spread will be profitable.
Photo Credit: Memphisspotter
The above information is provided by OptionsHouse, LLC (“OptionsHouse”) for informational and educational purposes only and is not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Commentary and opinions expressed are those of the author/speaker and not necessarily of OptionsHouse. Neither OptionsHouse nor any of its employees, officers, shareholders or affiliated companies guarantee the accuracy of or endorse the views or opinions of guest speakers or commentators. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees.
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