FedEx is due to report earnings on Thursday after the market close, and the options market is pricing in a 9.7% move in either direction. Today's column highlights a bull put spread trade in FedEx stock.
According to MarketSurge, analysts think the global delivery firm will post a 1% increase in earnings for the November-ended fiscal second quarter to $4.02 a share as revenue stays flat at $22.2 billion.
Let's analyze how we can structure an option trade that fits the view that 1) we think FedEx stock will stay within the expected range; and 2) the response to the earnings report is likely to be positive.
FedEx Stock Today: The Setup
Taking the at-the-money put and call for the Dec. 20 expiration, we can see that the expected range is 9.7%. Now that we know the expected range, let's find a bull put spread that has a break-even price roughly 9.7% below the stock price.
Selling the Dec. 20, 255-strike put and buying the 250 put would create a bull put spread. This spread was recently trading for around $0.95. That means a trader selling this spread would receive $95 in option premium. Maximum risk in this trade stands at $405 per set of contracts. That represents a 22.2% return on risk between now and the end of the week if FDX stock remains above 255.
If FedEx stock closes below 250 on the expiration date, the trade loses the full $405.
Break-Even Level
The break-even point for the bull put spread is 254.05, which is calculated as 255 less the 0.95 option premium per contract.
There is little room for adjustment with short-term trades such as this held over earnings. A 22% return in a few days would be nice. But the possibility of losing 100% is also very real. As such, this style of trade is only for traders with a high-risk tolerance.
According to IBD Stock Checkup, FedEx stock ranks No. 1 in its group and has a Composite Rating of 53, an EPS Rating of 57 and a Relative Strength Rating of 53.
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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
