Fedex Corp (FDX) – Returned to Sender

by riskreversal December 16, 2016 12:19 pm • Trade Ideas

Fedex Corp (FDX) reports fiscal Q2 results Tuesday after the close. The options market is implying about a 5% one day move, which is shy to the stock’s 6.3% one day post earnings average over the last 4 quarters, but rich to the 10 year average of about 3.5%.

The Dec 23rd weekly at the money 195 straddle (the call premium + the put premium) is offered at ~$10.50 (vs $196), if you bought that, and thus the implied move, you would need a rally above $205.50, or a decline below $184.50 by next Friday to make money.  

For the better part of the Spring and Summer FDX had been consolidating its gap to new highs following their fq2 results in March, and threatening new highs, which it did made in Sept, following its fq1 earnings gap. That gap helped establish a new range above $170, and this week we’re seeing the stock kiss the nice round number of $200:

[caption id="attachment_68999" align="aligncenter" width="600"] FDX 1yr chart from Bloomberg[/caption]

If I were inclined to play for a pull-back I might target the $180-185 breakout level from the then highs in 2015 as near term, as opposed to the recent breakout at $170:

[caption id="attachment_69000" align="aligncenter" width="600"] FDX 5yr chart from Bloomberg[/caption]

And looking out to the New Year and beyond the event itself it’s possible to set a wide range of profitability from 192 to 168 with a put fly:

*FDX ($196) Buy the Jan 195/180/165 put fly for 3.00
  • Buy 1 Jan 195 put for 6.30
  • Sell 2 Jan 180 puts at 2.00 (4 total)
  • Buy 1 Jan 165 put for .70

Break-evens on Jan expiration:

Profits: up to 12 between 192 and 168 with max gains of 12 at 180.

Losses: up to $3 between 195 and 192 & between 165 and 168, max loss of 3 below 165 and above 195

Rationale – This trade captures both the upcoming earnings event and any market shenanigans to start 2017. It targets a wide range below where it could be profitable and risks only $3 to do so (about 1.5% of the underlying.