Option Tip is to Buy Puts before the FedEx Drop-Off
FedEx Set to Slide before the Holidays
As many traders know and most new traders will learn, it is important to find a stock that has a great technical setup for playing either a bullish or bearish strategy. Therefore, the option tip for FedEx has a very bearish aspect which will involve playing put options.
FedEx Corporation (NYSE: FDX), originally known as FDX Corporation, is a logistics services company, based in the United States with headquarters in Memphis, Tennessee. The name "FedEx" is a syllabic abbreviation of the name of the company's original air division, Federal Express, which was used from 1973 until 2000.
FedEx Corporation (FedEx) provides a portfolio of transportation, e-commerce and business services under the FedEx brand. The Company operates in four segments: FedEx Express, FedEx Ground, FedEx Freight and FedEx Services. Federal Express Corporation (FedEx Express) is an express transportation company, offering time-certain delivery within one to three business days and serving markets.
The Reasoning for the Option Tip
FedEx was downgraded by TheStreet Ratings from buy to hold on October4th, 2011. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and growth in earnings per share. However, as a counter to these strengths, there are weaknesses including a generally disappointing performance in the stock itself and poor profit margins.
Highlights from the ratings report include:
• FDX's revenue growth has slightly outpaced the industry average of 7.1%. Since the same quarter one year prior, revenues rose by 11.3%. Growth in the company's revenue appears to have helped boost the earnings per share.
• FDX's debt-to-equity ratio is very low at 0.11 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.32, which illustrates the ability to avoid short-term cash problems.
• Net operating cash flow has slightly increased to $860.00 million or 8.04% when compared to the same quarter last year. Despite an increase in cash flow, FEDEX CORP's cash flow growth rate is still lower than the industry average growth rate of 31.87%.
• The gross profit margin for FEDEX CORP is rather low; currently it is at 24.60%. Regardless of FDX's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 4.40% trails the industry average.
• FDX has underperformed the S&P 500 Index, declining 20.85% from its price level of one year ago. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
Some analysts say that as the economy goes, therefore, so go the stocks of package shipping companies. Whether that is true or not is debatable, but one thing that is not debatable is that FDX has been in a downtrend since early July.
The stock had a tough time getting below a support area at $72, but now that it has, it looks like it might have a tough time climbing back above it. Currently FDX is at the old area of support that is now resistance, and it has formed a double-top, which can be construed as a bearish sign.
The Option Tip
Buy the FDX Nov 70 Puts for $3.50 or less.
The Strategy Behind the Option Tip
The long put strategy is pretty straightforward. The trade profits when the stock falls and the put premium increases as the stock moves farther and farther into the money. Maximum profit is almost unlimited because FDX can only fall to $0 (which is highly unlikely) and the maximum loss is $3.30 if FDX finishes above $70 at November expiration.
A nice target for the stock is in the $66 area. This is a trade that might hit the target area within a few days. Consider exiting the position if the stock trades above $74, which is another resistance area that would signal the end of the bearish trend.
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