FedEx is due to report earnings next Tuesday after the close. So, let's look at an iron condor trade. Option traders are expecting Fedex stock to stay in a range of plus or minus 7.2% based on option prices from late Tuesday.
After the last earnings announcement, FedEx stock moved just 0.8% higher. And, in the time before that, the stock shot 7.2% higher.
Traders who think FDX stock will stay within the expected range this time could look at an iron condor trade.
As a reminder, an iron condor combines a bull put spread and a bear call spread. The idea with the trade? Profit from time decay while expecting that the stock will not move too much in either direction.
FedEx Stock Today: Setting Up An Iron Condor
First, we take the bull put spread. Using the Dec. 23 expiry, we could sell a put option with a 162.50 strike price, then buy the 157.50 put. That spread sold on Tuesday for around $0.70 per contract.
Then the bear call spread. Construct it by selling the 192.50 call and buying the 197.50 call. This spread could be sold yesterday for around $0.60.
In total, the iron condor will generate around $1.30 per contract or $130 of premium.
The profit zone ranges from 161.20 to 198.80. 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 – 1.30 x 100 = $370. Therefore, if we take the premium ($130) divided by the maximum risk ($370), this iron condor trade has the potential to return 35%.
Risk In This Trade
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 hit or miss. FDX has stayed within the expected range following four out of the last five earnings releases. Although as we know, past performance doesn't guarantee future performance.
According to IBD Stock Checkup, FedEx stock ranks No. 5 in its group and has a Composite Rating of 51, an EPS Rating of 68 and a Relative Strength Rating of 23.
Elsewhere, this featured trade on Disney, this trade on Enphase Energy, this trade on Goldman Sachs and this trade on Tesla can all be closed for nice gains.
Please remember that options are risky, and investors can lose 100% of their investment.
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 Twitter at @OptiontradinIQ
