In The Money with Fidelity Investments: AAPL, FDX, DE, TLT & CSCO

On Tuesday in my In The Money series with Fidelity Investments, we quickly discussed the impact of Apple’s revenue warning on other U.S. multinationals and offered trade ideas on FedEx (FDX) and Deere (DE) that are likely to see near term revenue impact from the response to the coronavirus. Click below to watch:

Trade Idea #1: FedEx (FDX):

The first Idea was in FedEx (FDX) which has been struggling over the last couple of years with competitive issues, weak global growth, trade wars and now the shock of the quarantines and what will certainly be depressed business activity as a response to the global spread of the coronavirus.

FDX will report its fiscal Q3 results on March 17th, and given AAPL’s guidance cut today, there is a chance the company could pre-announce before that. The last two-quarters FDX has disappointed, with the stock trading down 10% the day after their Q2 print in Dec and closing down 13% the day after their Q1 print in Sept.

The stock has been a massive underperformer and in a nasty downtrend for the last year, with $150 to $140 serving as important near-term technical support:

The five-year chart below shows the air pocket below $140 down to $120:

SO what’s the trade? If I were in the camp that the company would once again miss and guide lower I might consider buying puts in March to play for a breakdown below $150:

Bearish Trade Idea: FDX ($160) Buy March 155 put for $4

Break-even on March expiration:

-Profits below 151

-Losses of up to 4 between 151 and 155 with max loss of 4 above 155

Rationale: this trade idea risks less than 3% of the stock price, has a break-even down 6%. One could tighten up the break-even a bit by making this a put spread, but given the likelihood of a miss and the poor technical set up, owning downside put premium makes sense if you think the stock could crater the 10-13% the stock has done on the last two earnings reports.

Last night on CNBC’s Fast Money, I had a little bull-bear debate with my pal and co-panelist Tim Seymour

Traders @timseymour and @RiskReversal go head-to-head on whether shares of $UPS will deliver big returns pic.twitter.com/CueOl8TGFi

— CNBC’s Fast Money (@CNBCFastMoney) February 19, 2020

Trade Idea #2: Deere (DE)

The next idea we discussed was in Deere (DE) a company that might also see some short-term weakness from the coronavirus but might also be the sort of company whose business can bounce back sort of quickly if the virus’s adverse effects were to slow materially in the next few weeks.

DE is scheduled to report its FQ1 results Friday before the open. The options market is implying about a 5% one-day move in either direction which is a tad rich to its 4.5% average one-day post-earnings move over the last four quarters.

Shares of DE are down 4% on the year, already showing some investor trepidation about the fear of slower global growth weighing on their sales. The stock has held the uptrend that has been in place since last spring but has some overhead technical resistance between $170 and $180:

If earnings and guidance are not as bad as feared, and the stock’s recent weakness discounts any more bad news, then the stock could set up for a decent retest of the prior highs near $180 if the coronavirus fears were to abate during the coming months. One way to help finance the purchase of longer-dated out of the money calls could be through a call calendar, selling an out of the money short-dated call and using the proceeds to help finance the purchase of a longer-dated call of the same strike, for instance:

Bullish Trade Idea: DE ($166.50) Buy Feb 21st weekly – June 170 call calendar for $6.50

-Sell to open 1 Feb 21st weekly 170 call at $2
-Buy to open 1 June 170 put for $8.50

Break-even on March expiration:
Max risk $6.50, below 170, Friday, Feb 21 weekly short call expires worthless. left long June 170 call for $6.50. The ideal scenario is that the stock is just below $170 on Friday’s close and the short Feb call expires worthless or can be covered for a small amount, leaving long the June 170 call.

Trade Management:

Review #1: Trade idea from Jan 21st ITM (read here):

TLT $139 – 20 yr US Treasury bond ETF
Bullish Trade Idea: Buy April 140 call for $2.50
-Break-Even at $142.50
-Max Gain: Unlimited Profits above 142.50
-Max loss of 2.50 if the stock goes below 140 less than 2%

Three choices Now with TLT at $145.50:

1. Take Profits, the April 140 call is now worth $6.50 for a $4 profit, look for a pull-back to get back in…

2. Spread by selling higher strike call in April expiration… maybe sell the April 150 call at $1.25, left owning the April 140 – 150 call spread for $1.25… or

3. Roll the bullish view up and out. Sell to close April 140 call at $6.50 and use some of the gains to buy a longer-dated call, extending the bullish view… consider buying the June 150 call for $2.20, and booking some of the gains.

I suspect bond yields make new lows and ETFs that track U.S. Treasuries make new highs:

Review #2: Bearish CSCO put spread from Feb 11, 2020 ITM (read here):

Bearish CSCO ($49.50) Buy Feb 49.50 – 46.50 put spread for $1

Now CSCO at $46.59, just above the short strike and three trading days to expiration, the put spread is worth $2.65.

At this point it makes sense to book the profit as it it is not worth risking the $1.65 gain for three days to make the 35 cents more than the put spread could be worth on Friday’s close if the stock was $46.50 or lower. Think of it this way, you are now risking the worth of the put spread for three days to make 35 cents, not a great risk-reward.

CSCO should find some technical support at $46, a level the stock has bounced off of a few times since August: