New Trade – $FDX: Return Address

by Enis October 22, 2013 11:44 am • Commentary

FDX is another name that has gone nuts in the last 2 weeks, as it broke out to a new all-time high above 120, leading to an immediate 10% rally from there in the past week.

The price action in FDX reminds us very much of how BA behaved after it broke out to a new all-time high in September (also surpassing its 2007 high).  In our post on BA in September, we wrote:

The breakout last week led to continuation this week, but it’s the steepness of the ascent this week that is the real surprise.  BA’s RSI reading is actually hitting its highest level today since July 2007.

BA has traded like teflon this year, but the current move looks to be too emotional to be sustainable.  A move back to the breakout area near $110 would provide a much better long entry.  At the least, I expect BA to consolidate in the 115-120 area before any further advance higher.

FDX’s huge RSI reading this week is very reminiscent of BA in September.  The BA fade trade ended up being a nice winner, but the structure was a crucial aspect of the trade as well.  Here’s what we’re doing on FDX:  

TRADE: FDX ($129.90) Bought Nov 130/125/120 Put Fly for 1.00

-Buy 1 Nov 130 Put for 3.10

-Sell 2 Nov 125 Puts at 1.32 or 2.64 total

-Buy 1 Nov 120 Put for .54

Break-Even on Nov Expiration:

Profits: Between 129 and 121 of up to 4.00, with max profit of 4.00 at 125

Losses: Up to 1 between 129 and 130, and between 121 and 120, with max loss of 1 below 120 and above 130.

Trade Rationale:  FDX is severely overbought, registering extreme momentum readings.  Unlike many of the tech high fliers, we don’t think FDX will have a steep fall following this move, since it’s a 6 year breakout in the making.  If 120 is the strong support we expect it to be, this put butterfly offers a stellar risk/reward way to play for a modest reversal in FDX over the next few weeks.