FedEx (FDX) will report Q1 earnings before the bell on Thursday, December 15. If you don’t want to bet on the direction of the stock, there is a way to trade it and profit before the earnings, no matter what the stock does.
As a reminder, I want to buy a strangle (Out of The Money calls and puts) a few days before earnings and sell it before earnings are announced. The idea is to take advantage of the rising Implied Volatility (IV) before the earnings. This time I’m going to play it in a slightly different way-- I’m going to sell further OTM strangle and create a short Iron Condor. I used this strategy to play AutoZone (AZO) earnings, and the trade produced a return of 20% in 5 days with very low risk.
I’m using this approach in two cases:
- When trading high priced stocks, to reduce the cost of the trade.
- When the time to expiration is less than two weeks, to reduce the negative theta.
FDX is currently trading at $82.60. I’m going to place the following trade:
- Sell FDX December 2011 77.5 put.
- Buy FDX December 2011 80.0 put.
- Buy FDX December 2011 85.0 call.
- Sell FDX December 2011 85.5 call.
The trade would cost $1.20-1.25. This is a debit trade, no margin requirements. My profit target is 25-30%. The downside should be no more than 10-15%.
The Implied Volatility of the options is still fairly low. It should gradually increase as the earnings date is getting close, although I don’t expect a drastic jump. If the stock moves 4-5% before earnings, it should produce very nice gains. Reminder: if you take this trade, don’t forget to sell before earnings.
The main idea behind this trade is “renting the strangle” before the earnings. An increase in IV should help to neutralize the negative theta and keep the floor under the strangle price. As we know, earnings are 50/50. This is a trade for those who don’t want to bet on the direction of the stock and don’t want to hold through earnings.
Additional disclosure: I will be initiating the FDX short condor in the next 72 hours