Last night FedEx Corporation (NYSE:FDX) reported earnings and the results were better than expected — they beat on the top and bottom lines. At first, the reaction was a sharp spike to $262 per share in after-hours trading. But as in most recent earnings reports, the guidance failed to wow investors so it’s now teetering over the flat-line. Margins were some source of worry to some experts, but so far it’s not a grave issue yet.
The knee-jerk reaction in the stock after hours and the fade are not surprising to me. I expected a small, short-term dip from interpreting the open interest data. Options had priced in a +/- $10 move this week, so this action is well within my expectations. The open interest showed some downside pressure to $142 per share. There was support below and some resistance above.
Now that the earnings event has passed, I want to set a bullish FDX stock trade — but one that would be a relatively easy win. Instead of buying the shares outright in this volatile equity market, I will use options. There I can build a healthy buffer zone between the current price and my risk just in case the political turbulence lingers for a few more weeks.
While markets are near all-time highs, I have more faith in downside support than upside potential, so using options allows me to profit even if prices stall. As long as Fedex stock stays above my support I can retain my maximum gains.
Fundamentally, FDX has a trailing-12-month price-to-earnings ratio barely above 20, so it is not bloated. In addition to the general market malaise, this and United Parcel Service, Inc.(NYSE:UPS) got hit hard on a headline from upcoming Amazon.com, Inc. (NASDAQ:AMZN) competition, so much of the easy froth has been already priced out of the stock. Now that the earnings uncertainty is gone, I can bet on the downside support to create income from nothing.
Click to Enlarge Technically, FDX stock had a bullish setup coming into its earnings, so if bulls can shrug off this earnings reaction they have an opportunity to target $260 per share or higher in the next few week. While I don’t need a rally to profit, if one ensues then my profits would come to me faster.
Most analysts on Wall Streets agree that FDX is a buy and that it deserves higher prices. Currently it’s trading well below their collective official range.
We live in a world where e-commerce is the way we are going, so the demand for delivery will continue to grow. FedEx is one of two major global competitors so I am confident that growth will continue for years to come. The value proposition in the stock can only get better with time.
FedEx Stock Trade Idea
The Trade: Sell the FDX JUN $200 naked put. This is a bullish trade where I collect $1 to open. Here I have a 85% theoretical chance of success, but if the price falls below my strike then I own shares and accrue losses below $199.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the FDX JUN $200/$195 credit put spread where I have about the same odds of winning but with much smaller risk. This spread would yield 10% if successful.
Subscribe to my YouTube channel for free content here. Get newsletter 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.
