Should Traders be Considering a Short Setup in FedEx Corporation FDX Ahead of Earnings?

FedEx Corporation (FDX) is a freight and logistics company with operations across a number of transportation and commerce businesses and is set to report its most recent quarterly earnings on Tuesday after the bell. The company’s stock is currently trading around $193.11 in a 52 week range of $141.19-$201.57. The stock has been very strong over the past 12 months with shares rallying by more than 33% over that period of time. Despite the stocks strength over the past year it does not appear to be setting up well for a long into earnings. To confirm this we will examine the stocks historical earnings performance record, the current implied move being priced into the options market, and the stock’s current chart setup.

The first thing we want to examine is the stocks historical price action on earnings day. We do this to see if there are any patterns in how the stock tends to move after the release of the report. Since we are only concerned with the patters around the catalyst we will look at the stocks performance on earnings day. This helps us isolate trends on earnings rather than longer run trends. In examining historical price action in FDX we can see that over the past 8 quarters the stock has sold off on earnings day 5 times with an average move of 4.5%. We can see here that although there is not a huge bullish or bearish bias in historical performance the stock does have a slightly higher tendency to sell off on earnings. With this in mind we can calculate an expected move for this release.

To determine how much the market is expecting the stock to move on earnings we can use the options market to calculate the market makers expected move by expiration. We want to isolate the catalyst expectations so we need to use the shortest dated line of options that still contains the catalyst event. In this case we will be using the Mar 24th Weekly options. Generally we would use the price of the at the money straddle but shares of FDX are currently trading in-between strikes. To get an accurate measure of expectations we will use the price of the at the money strangle. Below is the market for the FDX 192.5-195 Strangle.

FDX

Here we can see that the mid-market price of the straddle is around $8.75. This would indicate an expectation for a move of 4.53% higher or lower by options expiry. Since we know the stock normally moves around 4.5% this calculation shows us that options are fairly priced into the event and there is not likely an opportunity to sell premium ahead of the event.

With this in mind we can calculate an upside and downside target for FDX.

Upside Target = $193.11 + $8.75 = $201.86
Downside Target = $193.11 – $8.75 = $184.36

Using these levels we can now examine the daily chart in FDX

FDX

In the chart above we can see that the upside and downside targets are right at key levels of support and resistance. We can also see that while to be stock is above the cloud, the cloud itself is sideways and does not show a strong bullish trend. With this in mind we will lean on the historical data and look for a short position in FDX.

Possible Trade: Buying the FDX Mar 24th Weekly 190-185 Put Spreads for $1.50
Risk: $150 per 1 lot
Reward: $350 per 1 lot
Breakeven: $188.50

This trade gives a trader a better than 2-1 reward to risk ratio and has a breakeven point well above the stocks downside measured move target. This is the type of trade setup a trader can use to take a low risk high reward trade ahead of a catalyst event like earnings.

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