FedEx Corporation (NYSE:FDX) stock has had a great 12 months, but I do have a bone to pick with it. The price action has been too choppy. For what should be a simple business model, the stock should be a bit more stable. Instead we see a 30% rally, and within it two 20% moves, and several other moves 5% or larger.
Today, I want to profit from this volatility by creating profits with little risk.
Fundamentally speaking, FedEx is cheap versus its main competitor United Parcel Service, Inc. (NYSE:UPS). FDX stock’s price-to-earnings ratio is almost 50% lower than that of UPS. But if my hunch is right about the technical potential in FDX, investors will play catch up soon enough.
Click to Enlarge Not only is it relatively cheap, FDX has value from a price-to-book perspective as well. Another attractive metric is price-to-sales, which is below one. So the whole fundamental picture is conducive to an upside burst, and therein lies my opportunity.
I am not alone in this opinion. The average analyst price target is $237 per share so clearly the excitement is there. But perhaps there’s too much of it, meaning that I always worry when consensus is so one-sided; it leaves room for major disappointment. Almost all analyst rate FDX as a buy.
So, even though I want to profit from the potential rally, I won’t be risking $215 per share to buy FDX stock. Since it’s 2% away from its all-time high, I will need some room for error. Luckily I can use options to set up a trade to create safer profits than simply chasing prices higher.
Technically speaking the FedEx stock price action is constructive on the daily, weekly and monthly charts. All three time-frames show it’s trading at the upper end of range limits, but they also show bullish patterns in the making. Also, the technical breakout in the transports ETF iShares Dow Jones Transport. Avg. (ETF) (BATS:IYT) also supports the breakout idea from its own bullish patterns.
This combined with the value in FedEx stock give me enough confidence to sell downside risk to create income. This would be bullish setup with no money out of pocket. Pivotal to this strategy is that I can commit to buying the shares if the price falls this year.
FDX Stock Trade Idea
The Bet: Sell the FDX Jan 2018 $175 put naked and collect $1.70 per contract. Here I have an 85% certainty that the stock will stay above my put so I can retain maximum gains. Otherwise I will own the shares and can accrue losses below $173.30.
Sometimes selling naked puts is not possible, so I could sell spreads instead. There, the risk is limited by the width of the spread.
The Alternate: Sell the FDX Jan 2018 $180/$175 credit put spread where I have about the same odds of winning and the reward is 8% yield.
Since there are no guaranteed results when investing in the stock market, I never bet more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.