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  • FedEx Q2 Earnings Plays 0 comments
    Dec 19, 2012 10:17 AM | about stocks: JOY, FDX

    FedEx (NYSE:FDX) is set to issue their earnings announcement tomorrow morning for their fiscal 2nd quarter of 2013. The past four earnings releases have either beat, or have been close to the highest analysts' estimates. FDX earnings have been tightly correlated and levered to the economic growth or lack of in the emerging markets, especially China. Recently we have seen companies report better than expected earnings indicating strength in the emerging markets. Joy Global (NYSE:JOY) released its earnings report last week. The machinery manufacturing company that sells mining equipment to emerging market nations, indicated growth in the emerging markets has slowed, but not to the level many analysts were expecting. Joy gave positive guidance, which could indicate positive growth to continue.

    Traders can place trades this afternoon, to attempt to trade around FedEx's earnings release tomorrow morning. Using options, these 5 trades below, offer ways to trade the stock for a bullish, bearish, or neutral outlook. All options used will be the Standard December Expiration Options with FDX currently trading at $92.66 and front month volatility at 41.4% while back month volatility is 24.2%.

    Assumption #1: FDX will have positive earnings and guidance and climb

    Strategy #1a: Sell a Put Spread

    Sell 90 Put Buy 87.5 Put

    Credit: $.37/contract

    Potential Max Loss: $5.00/ contract -$.34=$4.63

    Probability of Maximum Return: 76%

    Break Even: $89.63

    Note: Selling a put spread is a bullish strategy with defined risk, in which you will be able to take advantage of Theta Decay, or the decrease in option value from time decay and shrinking days to expiration. Since Apple has falling dramatically its option premium has expanded. Selling options will allow you to collect this extra premium from a volatility contraction. As long as Apple remains above your designated short put, you will keep the entire credit.

    Strategy #1b: Buy a Call Spread

    Buy 92.5 Call Sell 95 Call

    Cost: $.96/contract Debit

    Potential Maximum Value: $2.50/contract

    Probability of Maximum Return: 26%

    Potential Maximum Loss: Your cost, $.96/contract

    Break Even: $93.46

    Note: Buying a call spread is a bullish strategy with limited risk, as well as, limited maximum return. The maximum your position can be worth is the difference between the two strike prices used. The potential loss or risk is the amount you pay for the spread.

    Assumption #2: FDX will hint at a global slowdown and suffer from continued recessions in Europe and the stock will fall

    Strategy #2a: Sell a Call Spread

    Sell 95 Call Buy 97.5 Call

    Credit: $.43/contract

    Potential Max Loss: $5.00/ contract -$.43=$4.57

    Probability of Maximum Return: 76%

    Break Even: $95.43

    Strategy #2b: Buy a Put Spread

    Buy 92.5 Put Sell 90 Put

    Cost: $.87/contract Debit

    Potential Maximum Value: $2.50/contract

    Probability of Maximum Return: 25%

    Potential Maximum Loss: Your cost, $.87/contract

    Break Even: $91.63

    Assumption #3: FDX will rise or fall, but within a small measured amount

    Strategy #3a: Iron Condor

    Buy 85 Put Sell 87.5 Put Buy 97.5 Call Buy 100 Call

    Credit: .25/ Contract

    Potential Max Loss: $5.00/ contract -$.25=$4.75

    Probability of Maximum Return: 80%

    Break Even: $87.26 and $97.74

    Note: By using an Iron Condor a trader has the ability to profit as long as the stock closes at expiration within the short strikes. Traders have a low delta, and high theta in this strategy. Traders get paid using an Iron Condor as time and volatility are taken out of the option contract prices.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: options Stocks: JOY, FDX
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