FedEx: Using A Short Put Spread To Profit From A Bullish Move

FedEx has experienced a rally off of its poor earnings in September and December and has a strong technical setup. A short put spread is a limited risk way to generate income for this near-term trend. FedEx is at an attractive valuation, pays a good and climbing dividend, and has a favorable risk to reward position.

FedEx Corporation (FDX) has lagged the S&P 500 ETF (SPY) over the past year where it saw itself down 31.5% vs. SPY down 19.6%, to a gap of 11.9%. However, over the past 3 months, FedEx has been on a tear, out-performing the S&P by 13.6% over the past three months.

FedEx’s Lagging Over The Past Year

Source: SeekingAlpha

FedEx’s Out-Performing Over The Last Quarter

FDX chart

Fundamental Focus

FedEx Corporation provides transportation, e-commerce, and business services in the United States and internationally. The company’s FedEx Express segment offers express transportation, small-package ground delivery, and freight transportation services; time-critical transportation services; and cross-border enablement, technology, and e-commerce.

FedEx is buoyed by cost cutting and solid valuations.

Deutsche Bank analyst Amit Mehrotra says, “On the positive side, it was clear that FedEx’s cost actions finally took hold.” Mehrotra has a Buy rating on FedEx with a $217 price target.

Citi analyst Christian Wetherbee sees “some positives and some negatives” for FedEx. On the positive side, FedEx beat the $2.75 earnings per share guidance by a substantial amount with upside in Express and Ground. He adds, “As we get closer to the bottom, we get the sense investors want to own FedEx, so while we still think it’s a bit early in the economic cycle to get materially more constructive, we expect relative outperformance near term.” Wetherbee keeps a Neutral rating on FedEx with a $190 price target.

Let’s explore the fundamentals, the technicals, and an options trade that is neutral to bullish on FedEx.

FDX Fundamentals: Good Cash And P/E

SeekingAlpha rates FDX Profitability Grade as an A+ with strong cash from operations that are above the sector average and 27% above FDX’s 5 year average. FedEx’s P/E (FWD) is rated a B at 13.35, 25% below the sector median of 17.78, and 5.6% below its 5 year average P/E of 14.15.

FedEx: A Well Paid Dividend

FedEx pays a quarterly dividend of $1.15 that translates into a 2.6% dividend yield. However, FDX has raised its dividend consistently into the June payment on average by 17.2% since 2017. In the recent June payment, FedEx raised its dividend 53%, no doubt reflecting its strong cash position. SeekingAlpha rates FedEx’s Dividend Yield to Dividend Payout Ratio (TTM) as an A- at 10.20%, 69% above the sector median of 6.04% and 29.4% above its 5-year average of 7.88%.

Dividend history

Income Options Trade

For stocks such as FedEx with strong momentum and good underlying fundamentals, we can develop advantageous options strategies. These trades may be shorter duration than our fundamental and technical outlook, but we can repeat the options trades until the opportunities disappear, preferably, as this trade does, avoiding earnings announcements. The options trade for this particular set up is a bullish short-put spread with limited risk. Overall, we are looking to find the best options value based on the historical distribution of stock price returns.

Scanning For FedEx Short Put Spreads

The top result of our scan was a bullish short put spread on FDX expiring on January 20th. The $172.5 and $167.5 strikes are used. With a risk to reward ratio of 1 to 5.4, representing a max gain of $78 and max loss of $422, with a high probability of profit at 79%, the trade looks good for those with a near-term time horizon.

The profit and loss distribution illustrated below shows that shares can pull back further before losses are incurred.

Short Put Spread Payoff Picture

FDX options chart

Source: ORATS

The Technical Take

FDX has recently rallied from its October lows forming an uptrend. The stock price has bumped off of upper resistance and lower support, strengthening the trend channel from a technical perspective. The lower support in the $170s fits the options trade well. The trade reaps its max profit if the stock stays above the short strike of $172.5 at the January 20th expiration.

FDX: Breaking Out To The Upside

FDX options chart

The Bottom Line

FedEx shares are in a nice up-trend rally off the October lows and have strong fundamentals behind them. The recent gap up is also strong technically. The short put spread is a defined risk trade with high probability of profit especially with this setup.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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