Yesterday we previewed earnings events inboth Adobe (ADBE) and FedEx (FDX). In both cases we offered a stock alternative. In Adobe we also included a leverage trade for existing shareholders and in FDX we included a headge for long holders. Both stocks are higher this morning so it’s a good chance to check in on the trade ideas and see how they could now be managed.
First, let’s look at ADBE. They beat estimates and gave good guidance. The stock is up 7% on the day. We detailed two trade ideas, the first to go over is a bullish stock alternative. Here was the trade idea from yesterday:
In lieu of 100 shares of ADBE ($100), buy the Oct 100/110/120 call fly for 2.50
- Buy 1 Oct 100 call for 3.30
- Sell 2 Oct 110 calls at .42 (.84 total)
- Buy 1 Oct 120 call for .04
With the stock at 107.50 this trade is worth about 5.50, or more than a double. That’s a pretty nice overnight gain. As far as trade management, the fly is obviously not capturing all of its intrinsic value at this point, if today was expiration this trade would be worth 7.50. So there’s almost 2 dollars in gains yet to be realized. But volatility has already come in substantially, so to capture that other 2 (extrinsic) dollars, you’d basically have to wait for October expiration to get closer (the extrinsic value becomes intrinsic and a gain in a non linear fashion with the most happening in the last few days before expiration). Therefore, if you’re happy with those gains, the trade can simply be closed today. For those that are looking to stay long you’re in a good position and the only real worry is deltas on a reversal. The call fly is about 20-25 deltas here. But those deltas will approach 100 in the next few weeks if the stock is between 100 and 110. So manage accordingly if sticking around. The max gain on this trade is at 110.
And
The second ADBE trade idea was an overlay for existing shareholder with the intention of adding yield/leverage on a move higher. It was a 1×2 ratio call spread. Here was the overlay:
Against 100 shares of ADBE ($100), Buy the October 105/110 1×2 ratio call spread for .50
- Buy 1 Oct 105 call for 1.34
- Sell 2 Oct 110 calls at .42 (.84 total)
I love these overlays and think they should be in the toolbox for more investors. What this trade does is act like a supercharged over-write. Unlike a standard over-write, the goal isn’t to collect yield on upside calls, it’s to capture significantly more in the case of a move higher. If done at no cost of for a little (like in this case .50) a shareholder can significantly boost gains of a stock that continues to move higher. In this case, with the stock 107.50 this overlay is worth almost 1.50. So it’s added a dollar in gains on top of the big move in the stock and it has much more potential from here. With the stock 107.50 this is intrinsically worth 2.50. And it could be worth up to 5.00 if the stock is 110 on October expiration. As far as trade management this is actually zero deltas at the moment. So the mark to market value of this trade will not change much in the near term. But as we get closer to expiration this will change and the 105 call will approach 100 deltas while the 110 short calls approach zero deltas. That means the only thing to really worry about is a move back below 105.50 where the initial .50 would be at risk. The ideal situation is a move higher towards 110 over the next few weeks.
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Now on to FedEx. The stock is up $10 on earnings beating estimates as well as raising full year guidance. We had two trade ideas in the stock yesterday. One was a hedge for existing shareholders that can probably be closed (or at least sell the put spread and maybe keep the short call on as an overwrite and look to re-establish put protection later on and higher strikes). The second trade idea was a stock alternative:
FDX ($163.65) Buy Sept23rd weekly Call Butterfly 162.50 / 170 / 177.50 for $2
- Buy 1 Sept23rd 162.50 call for 4.10
- Sell 2 Sept23rd 170 calls at 1.17 each or 2.34 combined
- Buy 1 Sept23rd 177.50 call for 24 cents
This expires on Friday. With the stock 172.50 it is worth 3.75, or nearly a double. One of the reasons it’s not worth more right now is the stock actually outperformed the implied move and the stock is above the short strikes of the call fly. It is now short deltas (just a few) and its max gain is back at 170 in the stock. So it’s a winner and can be taken off, of if the stock pulls back a little it’s in great shape to be worth more. It can be worth up to 5.50 at 170 so for management. If it starts going up maybe take the profits. If it starts going a bit lower, you can be patient.