On Monday prior to FedEx’s (FDX) fiscal Q1 results that evening I detailed a defined risk bearish trade idea (or protection for longs) citing:
you might’ve been able to tell from the clip that I wonder why such a cheap stock (FDX) trades well below a market multiple despite its P/E at levels below its expected eps growth rate this year and next. Also the stock’s 15% rally from its late June lows, and it’s 7% rally in just the last two weeks makes me a tad cautious as the stock approaches the downtrend that has been in place since January.
If I were long stock and looking to hold on, I might consider slapping on near-term protection after such a sharp rally of late, or looking to play for a pullback towards $240 over the next month
And the trade idea:
FDX ($258) Buy Oct 12th weekly 255 – 240 put spread for $3.10
-Buy to open 1 Oct 12 weekly 255 put for 4.20
-Sell to open 1 Oct 12 weekly 240 put at 1.10
Break-even on Oct 12th weekly expiration:
Profits of up to 11.90 between 251.90 and 240 with max gain of 11.90 below 240
Losses of up to 3.10 between 251.90 and 255 with max loss of 3,10 above 255
FDX closed down 5.5% yesterday, just above the short strike of the put spread at $241.58. As I suggested in Monday’s post, $240 looks like near-term support, but given the fact the stock closed on the dead low I suspect we see lower lows in the days to come:
With the stock this morning at $242, the Oct 12th weekly $255 – 240 put spread can be sold at about $10 vs the purchase price of $3.10 detailed Monday when the stock was $258. At this point, I think it makes sense to take the profit and move on as it can only be worth $15 on Oct 12th expiration, and it does not make sense to risk $10 to possibly make another $5 with the stock very near the low strike. The bet to stay long the put spread would be that the stock will stay lower for longer, and it is really a coin flip.