Fedex (FDX) is due to report earnings after the close on Tuesday. The Barchart Technical Opinion rating is an 88% Buy with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
FDX rates as a Strong Buy according to 13 analysts with 1 Moderate Buy rating and 10 Hold ratings. Implied volatility is 34.80% which gives FDX an IV Percentile of 49% and an IV Rank of 46.64%.
FedEx Corporation is the leader in global express delivery services.
The company provides a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the FedEx brand.
The company is currently reporting, primarily through the FedEx Express (including TNT Express acquired in 2016), FedEx Ground and FedEx Freight segments.
FedEx Express offers time-definite delivery to more than 220 countries and territories, connecting markets that comprise almost the entire gross domestic product of the world.
Today, we’re going to look at an iron condor trade placed over earnings. These types of trades can be high risk, so make sure you understand how they work before attempting something like this.
An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.
When implied volatility is high, the wider the expected range becomes.
The maximum profit for an iron condor is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
FDX IRON CONDOR
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
First, we take the bull put spread. Using the June 23 expiry, we could sell the 220 put and buy the 215 put. That spread could be sold yesterday for around $1.00.
Then the bear call spread, which could be placed by selling the 250 call and buying the 255 call. This spread could be sold yesterday for around $0.80.
In total, the iron condor will generate around $1.80 per contract or $180 of premium.
The profit zone ranges between 218.20 and 251.80. This can be calculated by taking the short strikes and adding or subtracting the premium received.
As both spreads are $5 wide, the maximum risk in the trade is 5 – 1.80 x 100 = $320.
Therefore, if we take the premium ($180) divided by the maximum risk ($320), this iron condor trade has the potential to return 56%.
If price action stabilizes, then iron condors will work well. However, if FDX stock makes a bigger than expected move, the trade will suffer losses.
Trades held over earnings allow little room for adjusting, so they can be a bit hit or miss. FDX has stayed within the expected range following three of the six most recent earnings releases. Although as we know, past performance doesn’t guarantee future performance.
Conclusion And Risk Management
Short-term trades over earnings such as these ones are almost impossible to adjust. Either the trade works, or it doesn’t so position sizing is vital. Short-term trades also have assignment risk, so traders need to be aware of that possibility. This type of trade may not be suitable for beginners.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
