Income Trade in FDX

[Steven Place]

FDX has reported earnings and is still in a pretty good uptrend. I am expecting a drift higher, but for the actual volatility to fall.

Since earnings are out of the way we can put on a put butterfly strategy.

Buy 1 Jan 125 Put

Sell -2 Jan 115 Pu

Buy 1 Jan 105 Put

Debit: 2.75

This trade has a longer duration, which means it’s a “slow cooker” trade.

Put on only 1/3 of a position on the outset, as FDX moves to either 121 or 108 we will add to the position.

Target profit is 20% of the total investment in the trade.

[Steven Place]

FDX ripped higher on stock repurchase news. This isn’t the best for our income trades, but since we are scaling in, we can add to the trade as planned.

Add the Jan 110/120/130 Put butterfly for 2.50 or lower.

Here is what the risk will look like now (assuming you’re doing 3 butterflies at a time)

Next add is at 125.

[Steven Place]

For the past week we have seen a parabolic move and the stock has blasted past 125 all the way to 130.

We will need to do 2 things.

1. Add our third butterfly.

Buy +3 Jan 120/130/140 Put butterflies at 2.60 or lower

2. Roll the lower fly higher.

Sell to close -3 Jan 125/115/105 Put butterflies at 1.30 or higher
Buy to open +3 Jan 120/130/140 Put butterflies at 2.60 or lower

If you want, you can combine the two butterfly order buys.

This moves our breakeven to 120 and 135, and gets our theta back to a nice area.

This is a tricky position but we have a few months to work with it.

[Steven Place]

This trade got ugly, quick. It didn’t help that when the trade was put on, we saw a big gap up on the news that they were going to do a big share repurchase program.

The stock really hasn’t looked back since then, and we’ve got earnings coming up. I’m going to exit out of the trade to cut any further losses that can occur.

Sell to close 6 Jan 120/130/140 Put butterfly at 2.15
Sell to close 3 Jan 110/120/130 put butterfly at 0.70

With that size, total loss is around 1250, which is on the upper end of the risk spectrum. Looking back, this trade would have been fine if we had waited for a true parabolic signal. Volatility was compressing too much, so the bet on bearish volatility was wrong here.

[Author]

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