Global courier FedEx ($FDX) is intractably boring, in my personal view. In an investing ecosystem filled to the brim with artificial intelligence and other innovation, the business of delivering parcels just doesn’t resonate with a lot market participants. However, understanding the dynamics of options trading may entitle investors to an entirely fresh perspective and payout structure for FDX stock.
The package delivery giant suffers from credibility concerns right now. Last month, FDX stock cratered after the company disclosed its first quarter of Fiscal 2025 earnings results. Due to lower demand in the domestic package market, revenue declined by about half-a-percent against the year-ago quarter to $21.6 billion. That set a poor tone along with a reduced outlook.
However, with shares down heavily following the earnings report, it’s quite possible that most of the bad news has been baked. Unless there is to be more bad news to come, investors have likely already digested the ugliness. Based on the normal ebb and flow of the equities ecosystem, FedEx has a chance to march higher. Therefore, I am net bullish on FDX stock, and offer a compelling options idea for investors to consider.
Deploying the Appropriate Strategy for FDX Stock
In the movie 21, a group of students at the Massachusetts Institute of Technology (MIT), led by a morally unscrupulous professor, used their card-counting skills to gain an advantage in blackjack. Essentially, when the deck was hot (more high-value cards), the gamblers would bet big. When the deck was cold, the students would reduce their wagers. It’s a similar principle with options trading.
Due to factors such as complexity and lower liquidity, the options market tends to feature far greater pricing inefficiencies than the “regular” stock market. In particular, the market’s expectations of future price movements — otherwise known as implied volatility (IV) — can essentially be priced higher or lower than realized or historical volatility (HV) over a given time period.
When it comes to options, it’s generally prudent to take what the market is giving you. In the case of FDX stock, implied volatility sits at about 22.75% compared to its average historical volatility of 51.63%. This means that options are priced lower than would normally be the case, incentivizing a debit strategy. Stated differently, we choose to pay a debit for either the right to buy (or to sell) FDX at a given strike price.
Deciphering the Type of Debit to Deploy
Again, given that HV is noticeably higher than IV, buying options seems to make more sense than selling options, all other things being equal. That’s because the market is providing us a relative discount to deploy a net debit strategy. However, the next part is the trickiest: should we be net long or net short FDX stock?
Fundamentally, as I mentioned earlier, investors have good reason to be skeptical about FedEx right now. After delivering disappointing results and a downbeat outlook, the business seems troubled. Furthermore, the company represents an economic bellwether. If package demand is down, that could mean consumers are pinching pennies.
Nevertheless, some experts believe that the Federal Reserve will be successful in engineering a soft landing. Plus, as it relates specifically to FDX stock, the market has already responded to the bad news. I believe it’s now time for the bulls to respond. I don’t think FedEx will rocket higher but it’s probably due for a slow march northward.
Enter the Bull Call Spread for FedEx
For those that share an optimistic view of FDX stock, there’s wonderful news available: you don’t need to see gargantuan performances to enjoy significant profitability. By deploying a bull call spread — a multi-leg transaction that involves the buying and selling of call options of the same expiration date — we can reduce our cost and our profitability threshold.
One idea (among many) popped into mind for the options chain expiring Dec. 20, 2024. It involves buying the $270 call at an ask of $17.75 and selling the $280 call at a bid of $12.35. The maximum we can lose in this trade is $5.40 per contract or the net debit ($17.75 – $12.35) paid. On the other hand, the maximum reward we can earn is $4.60 or the difference between the strike prices minus the net debit paid.
Primarily, the benefit of this trade is the reduced cost. If we only bought the $270 call, our profit potential would theoretically be unlimited. However, the cost of the call would be $17.75 or $1,775 when multiplied by 100 shares. It would also mean that FDX stock would need to rise to $287.75 just to break even. On the flip side, the break-even point for the bull call spread is only 0.6% above Monday’s close.
Understanding the Trade’s Implications
To bring home the point, for the straight call option to break even, FDX stock must rise by 5.1% at expiration (assuming intrinsic value calculations). Moreover, for this call to generate the same profit as the aforementioned bull call spread, FDX would have to rise by 6.8%. That’s a tall order because of the troubles implied by the poor earnings report.
It’s fair to say that we’re not necessarily bullish to the extreme. However, it’s very reasonable to expect that FDX stock might rise by 2.3% over roughly 10 weeks. And that’s all FedEx needs for the bull call spread to be fully profitable.
Finally, if the worst-case scenario materializes and FDX stock tanks, we’re not out $1,775. Instead, we’ve lost only $540. That may still a lot of money but given the choice between the two, the latter is obviously more favorable.
Wall Street’s Take on FedEx
Turning to Wall Street, FDX stock has a Moderate Buy consensus rating based on 14 Buys, seven Holds, and one Sell rating. The average FDX price target is $306.74, implying about 13% potential upside.
The Takeaway: A Smart Options Play to Jazz up Sleepy FDX Stock
Although FedEx recently disclosed poor earnings results, the market is forward looking. With the ugliness likely digested, there’s a decent chance that FDX stock will slowly march higher. Anticipating a potential +2.3% move in the next few months seems realistic, and there’s an options play that can be constructed on this expectation. With the market providing investors with a relative IV discount on debit-based strategies, a bull call spread for the $270 to $280 range can potentially be an effective profit-extracting trade right now.
