FedEx stock is showing elevated implied volatility with an IV (implied volatility) percentile reading of 99%. That means that the current level of implied volatility in FedEx is higher than 99% of all other readings in the past twelve months.
In part, that is because the company is due to report earnings after the close on Thursday, and we typically see elevated implied volatility around that event.
Traders who think FDX will not move too much following the earnings report could look at an iron condor trade.
Let's look at an example using FedEx stock.
FedEx Stock: Setting Up An Iron Condor
As a reminder, an iron condor combines a bull put spread and a bear call spread. The idea with the trade? Profit from time decay while expecting that FedEx stock will not move too much in either direction.
First, we take the bull put spread. Using the March 18 expiry, we could sell the 200 monthly put option in FedEx stock and buy the put with a 195 strike price. That spread could be sold on Friday for around $1.20. Then the bear call spread gets set up by selling the 230 call and buying the 235 call. This spread could have been sold on Friday for around $0.90.
In total, the iron condor will generate around $2.10 per contract, equivalent to $210 of premium.
Watch These Profit Zone Ranges
The profit zone ranges between 197.90 and 232.10. This can be calculated by taking the short strikes and adding or subtracting the premium received.
As both spreads are $5 wide, the maximum risk in the trade is 5 – 2.10 x 100 = $290. Therefore, if we take the premium ($210) divided by the maximum risk ($290), this iron condor trade has the potential to return 72.4%.
If price action in FedEx stock stabilizes, then iron condors will work well. However, if FDX stock makes a bigger than expected move, the trade will suffer losses.
Trades held over earnings allow little room for adjusting, so they can be a bit hit or miss. FDX has stayed within the expected range following four out of the last five earnings releases. Although as we know, past performance doesn't guarantee future performance.
According to the IBD Stock Checkup, FedEx stock ranks No. 4 in its group and has a Composite Rating of 44, an EPS Rating of 49 and a Relative Strength Rating of 30.
Please remember that options are risky, and investors can lose 100% of their investment.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ.
