Fundamentally speaking, FedEx Corporation (NYSE:FDX) is reasonably priced with a price-to-earnings ratio of 20x. This is true when you consider that it pays a dividend and it is a consistent performer. Furthermore, I like its financial metrics better than those of United Parcel Service, Inc. (NYSE:UPS).
FDX has a price-to-book under 4, so owning shares at a discount from its current price in the long run is not likely to be a major mistake.
If the price goes against my trade, I’m willing to own shares because I’m confident that I will be able to manage my risk for profits in that event.
My strategy is simple. I want to go long FDX stock, but I’m not sure that this is the absolute bottom in the dip. So, I use options to create a large enough pad between current price and my level of risk. That is to say, I want to own the FedEx shares, but a much lower price from here.
To implement my strategy, I sell puts at a level where I see definite value in FDX stock and if the price goes below it, I own the shares. Meanwhile,, I get paid a premium to do so. If the price holds above my strike, then I keep the premium with no shares and I would’ve created income out of thin air.
Technically, FedEx has done well for itself, rising 25% in a year. That’s more than triple the performance of UPS. But the bad part of fast-rising stocks is that they create rising wedges. And if the trend lines break, selling could accelerate. So if FedEx loses the battle around $220 per share, then it could lose an additional $20 from there.
Should that happen, it would simply be reverting to the last major pivot point. $200 per share has been in contention since the 2016 U.S. elections. Finally, this past May, the bulls broke through and have since used it has support to mount a 15% rally.
I have to recognize the reason for the dip in the shipper’s shares. Yes, you guessed it: Amazon.com, Inc. (NASDAQ:AMZN).
Rumors are floating around that AMZN is looking to enter the arena and compete with FDX and UPS. While AMZN is a scary foe, for now this is still a rumor.
The infrastructure required to become as significant a player as FedEx is massive, and AMZN would still have a long way to go.
Bottom Line on FDX Stock
The trade: Sell the FDX Jan $180 puts for $1. Here I have 90% theoretical odds that I would keep maximum gains. Otherwise, I would own shares and suffer losses below $179.
Selling naked puts in this sector is scary. Those who want to mitigate the risk can sell a spread instead. There, the maximum loss is much smaller.
The alternate trade: Sell the FDX Jan $195/$190 credit put spread, which has a smaller chance of winning, but less risk. It could yield 10% on risk. Compare this with needing to buy the stock and risking its face value, then without any room for error, need a rally to profit.
Neither setups require a rally to profit. I can still reap maximum gains, even if FDX stock falls further from here.
Whatever you choose to do, remember, investing in stocks is risky. Regardless of how careful I am, 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.
