FDX Stock: Use a Bull Call Spread to Grab a ‘Bennie’ by Next Weekend

A couple of days ago, I wrote an article for Barchart regarding FedEx ($FDX). At the time, the biggest news was its disappointing earnings report and a weak forecast for future quarters. Understandably, analysts were anxious because FedEx is considered one of the economic bellwethers. As they say, this is where the rubber meets the road. If FedEx is struggling, it signals that the broader consumer economy might also be in trouble.

Bearish Sentiment Already Priced In?

However, while acknowledging the risks, I felt that FDX stock had dropped excessively and that most of the bearish sentiment was already priced in. Given the significant drop in FDX stock, it didn’t seem logical for the security to continue declining, as the bad news was already baked in. Put another way, the ugliness had already been digested by investors and analysts. Unless there was new, negative information, it seemed riskier to assume the stock would continue to fall.

So far, my thesis has proven correct. Following the disappointing earnings report, FDX stock has generally moved higher. While it hasn’t been the most exciting opportunity, it has certainly risen from its post-earnings lows. Given that the stock has softened in recent sessions, there’s now debate about its next trajectory.

Options Data: The Key to Navigating FedEx’s Next Move

This is where knowledge of options data, specifically options trading, becomes incredibly helpful. We don’t ignore fundamental data; we acknowledge it. However, because the earnings report is now in the past, the current driver of market sentiment is what other traders believe will happen, not necessarily the actual news from several days ago.

Looking at options data, we see that implied volatility for FDX is 20.21%, whereas historical volatility is 51.05%. Essentially, this means that options are priced lower than usual. With the discount in pricing, it makes sense to consider a debit strategy, which involves paying a premium with the speculation that the underlying asset will move higher.

This contrasts with a credit-based option strategy, which involves receiving income and hoping the security moves in a favorable direction. A credit strategy is more defensive, while a debit strategy is more aggressive, speculating on upward movement.

Choosing a Strategy: Debit vs. Credit Options

One options chain I’m particularly interested in is the one expiring on October 4, 2024. Here, implied volatility is 21.11%, and historical volatility remains 51.05%. The question is: what kind of debit strategy should we consider? Should we go with a bull call spread or a bear put spread?

To answer that, we can look at the Delta of the options chain. Comparing the least five in-the-money puts to the least five in-the-money calls, the Delta for the puts is of a greater magnitude. Keep in mind that Delta for puts is negative, while Delta for calls is positive.

However, we make an apples-to-apples comparison by looking at absolute values.

Despite this small Delta discrepancy suggesting greater risk to the upside, I still favor a bullish trajectory. The difference is minute, so it’s possible the market’s expectation could be incorrect. In the absence of more negative news, FDX could continue to rise or at least trend steadily higher.

Bull Call Spread: A Tactical Play for Short-Term Gains

With that in mind, I’m considering a bull call spread. This strategy involves buying a call option and selling a call at a higher strike price to offset the cost of the bought call. Overall, this provides a structure of limited reward and limited risk. Here’s a specific trade that stands out:

• Buy the $262.50 call at an ask of $4.50

• Sell the $265 call at a bid of $3

• Maximum reward: $1

• Maximum loss: $1.50

• Breakeven: $264

This is attractive because FDX stock closed at $263.77 on Wednesday. To achieve the maximum reward, the stock only needs to reach or exceed $265, which is less than a half-percent increase.

Maximizing Gains with Limited Risk

Now, let’s compare this with buying a straight call at $262.50. You would pay $4.50 in premium, meaning the stock would need to rise to $267 (1.2% up) just to break even. With the bull call spread, FDX only needs to move half a percent to yield a profit of $1 per contract, or $100. That’s a fantastic deal, even for a relatively slow-moving stock like FDX.

One key advantage of the bull call spread is that it lowers the threshold to profitability. If we just bought the call option outright, the reward is uncapped. However, FDX must rise by at least the premium paid ($4.50) just to break even.

On the other hand, the spread allows us to offset this cost by selling the $265 call at $3. This reduces the net premium to $1.50, meaning FDX only needs to move up by $1.50 to break even. If the stock hits $265, we receive the maximum reward of $100 per contract.

By using this vertical options strategy, we ensure that we put points on the board, even with a modest stock movement. In contrast, if we just bought the call option and FDX only moved up half a percent, we wouldn’t break even, making the call option effectively worthless.

That’s the power of bull call spreads and, more broadly, vertical options spreads. Keep this in mind the next time you spot an opportunity in seemingly boring blue-chip stocks. Believe me, when it comes to options, there’s no such thing as a boring opportunity.

Disclaimer:

Stock trading involves significant risks and is not suitable for every investor. The strategies and ideas discussed in this article are for informational and educational purposes only and should not be construed as financial or investment advice. Always conduct your own research or consult with a licensed financial advisor before making any investment decisions.

Please note that selling options can expose you to unlimited liability if the underlying asset moves against you. It is crucial to exercise your in-the-money bought options to offset the potential liability of your in-the-money sold options, particularly in volatile markets. Make sure you fully understand the risks and mechanics of options trading before engaging in these types of transactions.