Since cratering after earnings last month, FedEx (NYSE:FDX) has been clawing its way out of the abyss. At $238, FDX stock has now rallied 7% off the lows. But now the hard part of the snap-back begins. With resistance fast approaching the mettle of buyers will soon be tested. Will they have the power to push through? Or, will sellers maintain their newfound control?
Today we’re going to illustrate how to bet on the latter.
By throwing our lot in with bears, we’re essentially betting on the principle of polarity, which states that old support becomes new resistance. June’s high-volume freefall shattered the 50-day and 200-day moving average and prior horizontal support zones. The last few weeks of recovery have returned FedEx stock to the scene of the breakdown — near $240.
If we see resistance form in this area, it will present an attractive low-risk entry for new bearish trades.
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As usual options traders have a variety of strategies at their disposal to exploit the next descent. Making the selection comes down to a variety of factors like whether options are cheap or expensive and whether they’re seeking a high probability, low reward outcome or a low probability and high reward.
To provide a larger margin of error, let’s go with a high probability play using bear call spreads.
The FDX Stock Option Trade
Sell the Sep $260/$270 bear call spread for $1.03 credit. Consider it a bet that FDX remains below $260 for the next 58 days. The max reward is limited to the initial $1.03 and will be captured if the calls expire out-of-the-money. The risk, and initial cost, is $8.97. To increase the odds of success, you could consider scaling-in to more call spreads if FDX rises further from here before eventually rolling over.
Enter the first batch around the $1.03 credit, but look to add more around $1.60 and $2.10, respectively.
As of this writing, Tyler Craig held bearish options positions in FDX. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
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