2nd Update Sept 18th, 2012 at 1:28pm: The options market pricing of FDX’s Q1 earnings release led me to my trade in Oct. After the company had already pre-announced a weak Q1 back on Sept 4th, I thought the current pricing of the move into this mornings report at only 2% was too cheap. Well the stock is only down about 2.45% on weaker than expected outlook for the current qtr and the balance of the year. At this point the next real catalyst will be the Oct 9th investor meeting that the company will attempt to further detail restructuring efforts in their struggling Express division.
As some readers may recall, I debated buying Sept Put Spreads (below) but ended up buying Oct to make the trade much less dependent on the “move” following this mornings print and the little time to earn it out. I had to get the direction right in Sept or the premium would have quickly been rendered worthless. For example the trade that I considered just for the event, the FDX Sept 87.50/85 Put Spread for .35 (stock ref 89.25) is now worth about .78 with the stock down 2.45 % at 87.01. Not bad, more than a double, but If I were long it, I would be very tempted to take the money and run.
The trade that I settled on, the FDX Oct 87.50/82.50 Put Spread for 1.05, now worth 1.55 (stock ref 87) is not as profitable, but I have a ton more time and another event that could help catalyze the stock down towards my lower strike and through long term support, and much greater profit potential. The Sept would have been a day trade, where the Oct was more of an intermediate term view.
NOW I am going to stay put with my Oct spread and look to take off half when I have a double and let the other half ride.
Update W/ New Trade Sept 17th, 2012 at 3:39pm: In an effort to avoid a binary situation, long Sept premium into an event, I decided to look at verticals in Oct as the company is also hosting an Oct 9th investor meeting that should keep vol bid.
TRADE: FDX ($89) Bought the Oct 87.50/82.50 Put Spread for 1.05
-Bought 1 Oct 87.50 Put for 1.62
-Sold 1 Oct 82.5 Put at .57
Break-Even on Oct Exp:
-Profits btwn 86.45 and 82.50 make up to 3.95, max gain at or below 82.50 0f 3.95.
-Losses of up to 1.05 btwn 86.45 and 87.50 with max loss of 1.05 above 87.50.
Conviction Level: This is a 1% position, as I have no way of knowing whether the company will guide down, but vol is cheap with 2 events in Oct.
Original Post 3:04 PM EDT – SEPTEMBER 17, 2012: Name That Trade – FDX: Fiscal Q1 Preview & Thoughts
Event: FDX reports fiscal Q1 tomorrow morning before the open. The Implied move in the options market is only about 2% vs the 4 and 8 qtr avg of 5.5% and 4.2% respectively. The implied move is muted due to the fact that on Sept 4th the company guided earnings for Q1 down to 1.37 to 1.43 a share from their previous guidance of 1.45 to 1.60, bringing the mid point down by about 8%. The company cited global economic weakness and “constrained revenue growth at FedEx Express” for the miss. IF FDX reports less than 1.46 a share, this will mark the first year over year quarterly decline since the bottom in Q2 2009 (the bottom, meaning the big bottom).
Options prices clearly suggest that the earnings pre-announcement earlier in the month was the main event and that the company’s Q2 is less important for the stock.
Price Action/Technicals: While the stock has under-performed the SPX ytd (up 6.8% vs 16% for SPX) it has out-performed the Dow Jones Transport Index by almost 4%.[caption id="attachment_16754" align="aligncenter" width="490" caption="TRAN vs SPX vs FDX from Bloomberg"][/caption]
Technically, FDX is sitting right on its 200 day moving average, and right below the uptrend that had been in place from last years lows, right up to the pre-announcement. The stock almost touched $85 two weeks ago and held what appears to be a fairly significant support line at that level.[caption id="attachment_16755" align="aligncenter" width="490" caption="1 yr FDX chart from Bloomberg"][/caption]
MY VIEW: FDX is by no means an expensive stock trading at about a market multiple of ~13x fiscal 2013, and a nice discount to UPS, but given their almost 30% revenue exposure outside the U.S., their exposure to premium express services and international freight, FDX’s business is not likely to turn on a dime, and the guidance for fiscal Q2 likely holds the key to whether or not the stock holds that $85 level in the near term.
Here is one little trade that looks interesting to me, but I am going to pass on it, because it is a sort of binary trade. With vol so low into the earnings event, some may be tempted to buy some premium and pick a direction. Given the technical support at $85, the Sept 87.50/85 Put Spread offered at .35 (stock ref 89.25) looks very attractive if you thought lowered forward guidance could pressure the stock. This trade breaks-even down about 2.2% or inline with the implied move, and offers profits of up to 2.1o if the stock was $85 or lower on this Friday’s close. But I am not sure that gives me enough time for the thesis to play out, especially in a market where the few dips we have are being bought.
Very little of what the ECB and the U.S. Fed said or did in the last couple weeks is likely to help the fates of company’s like FDX in the near term, and very possibly artificially inflate the price of oil creating further headwinds. But I am going to try a new one on you people and one that I think makes sense given where vol is in Sept and Oct, meaning there are few options that look attractive to sell.
I want to post this so those can consider different trades that may make sense for u, hopefully I will find a trade that I like and will post prior to the close.