FedEx (FDX) announces earnings tomorrow morning – what to do? Normally I tell my subscribers to sit an earnings announcement out. Bellwether FDX is another story. Why? The stock, long term, is cheap. And the way to play it is to sell some puts. Or maybe set up a bull put spread. Ask yourself the following questions:
- Is online commerce going to grow faster – much faster – than the rest of retail and the rest of the economy? (If you answer no, my next question is: have you been living on Mars or Venus?)
- Can anyone break the UPS (UPS)/FedEx duopoly? The USPS will always be there, but they are not a player to worry about. New competition is not going to happen, too expensive to even try.
- Are oil and gasoline prices going to stabilize, and stabilize operating costs? Absolutely – and more importantly, the ground fleet of trucks, over time, is beginning the evolution to radically lower the cost to operate natural gas powered trucks.
So, longer term, you gotta believe. And I believe tomorrow the ground business will pull the company’s earnings through, as will the forecast for the rest of the year, and the stock will rise. But you never know, so…here are some ways to play the stock around earnings.
Sell Long Term Puts (conservative approach): If you sell the FDX January 2014 $90 puts, you will generate around $4 a share in cash. That is a roughly 10% return on an annualized basis and you will have lowered your cost basis for the stock, if you are put the stock, to $86. At $86 a share FDX is selling at a discount to the market, less than 14 times forward earnings.
Sell Short Term Puts (aggressive approach): If you believe more strongly in a good announcement, consider selling the FDX June $95 put. You will get around 80 cents, or $80 a contract. If the stock does not close below $95 before expiration on Friday, you have a roughly 1% return in three days, or a 50% gain on an annualized basis. If you want to be hyper aggressive, sell the $100 puts for around $2.85 if the stock rises and stays above $100. You’d net almost 3% in three days, around a 150% annualized return.
Sell a Bull Put Spread (sexy approach you can brag about at a party): A spread is a set of two transactions where you go short and long via two different options on the same stock. Spreads limit both your upside and downside and stretch your capital. One spread to consider here would be to sell the $105 put and buy the $95 put. You generate $6.70 a share from the sale of the put, you spend 85 cents per share to buy the other put, netting out $5.85 a share (it is called the net credit from the transaction), cash in your pocket.
If the stock falls and you decide to accept the stock, your net cost is $99.15 a share, about where it is right now. If the stock closes at any price above $99.15 you make money. And if it spikes above $105 you can keep all of the $5.85.This spread requires $415 in capital – the difference in the strike prices, $1,000, minus the $585 generated by the transaction in the form of that net credit. This gives the spread a potential return of more than 100%, potentially, possibly, maybe.
Think about it.
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