FedEx recently gapped lower on a disappointing earnings release and the stock is likely to face headwinds over the next few weeks. Therefore, traders who think the shipping giant will not get back above 255 in the next few weeks could look at a bear call spread in FedEx stock.
The stock chart shows strong resistance at 255, which is also where the 50-day moving average currently resides.
Also, the NYSE-listed large cap is barely holding bullish support near its 40-week line on a weekly chart.
FedEx Stock Today: The Bear Call Spread
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, so long as it stays below the short call at expiry.
A Jan. 19-expiration bear call spread trade on FDX stock using the 255-260 strike prices can be sold for around $0.95 per set of contracts, based on recent trading. Traders selling the spread would receive $95 in option premium — the maximum possible gain. The maximum loss would be $405.
The spread will achieve the maximum profit if FDX stock closes below 255 on Jan. 19. In this case, the entire spread would expire worthless, allowing the trader to keep the $95 option premium.
Losses Get Capped
The maximum loss will occur if FedEx stock closes above 260 on Jan. 19, which would see the premium seller lose $405 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy. That is, you always know the worst-case scenario in advance. A stop loss could be set if FDX trades above 155, or if the spread value rises from $0.95 to $1.80.
Those who think FedEx stock could move higher from here should not enter this trade. The position starts with a delta of -8, meaning it is roughly equivalent to being short 8 shares of FDX stock.
According to IBD Stock Checkup, FedEx stock ranks top in its group and has a Composite Rating of 55, an EPS Rating of 88 and a Relative Strength Rating of 57.
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
