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FedEx Corp. Options Point To Near-Term Share Price Pullback

Today’s tickers: FDX, IR, XLK & CSTR

FDX - FedEx Corp. – Bearish activity cropped up in FedEx Corp. call and put options within minutes of the opening bell this morning. Shares in the provider of transportation, e-commerce and business services are down 1.9% to stand at $75.59 as of 11:40 am ET, with less than one week to go before the Memphis, Tennessee-based company is scheduled to report first-quarter earnings. Yesterday, FedEx rival, UPS, reaffirmed its full year earnings guidance, but warned of difficult economic conditions and anemic growth. Traders positioning for shares in FedEx to extend losses, and possibly dip to new 52-week lows ahead of October expiration, initiated a few different bearish strategies in the first half of the session. Plain-vanilla put buying ensued at the Oct. $77.5 strike, where roughly 1,900 in-the-money puts were purchased for an average premium of $4.07 apiece. Investors long the puts profit at expiration next month if shares in FDX slide 2.85% from the current price of $75.59 to breach the effective breakeven point on the downside at $73.43.

Most of the volume in FedEx options was generated by one strategist, who initiated a three-legged bearish spread straight out of the gate this morning. It looks like the investor sold 2,500 calls at the Oct. $85 strike in order to purchase the 2,500-lot Oct. $67.5/$75 put spread. The transaction cost the trader a net premium of $0.90 per contract. The investor may be employing the three-way spread to take finance an outright bearish view on the stock, or could be using the trade to hedge a long position in the underlying shares. Profits are available to the trader should shares in FDX drop 2.0% to breach the effective breakeven price of $74.10 by expiration day. The investor may walk away with maximum potential profits of $6.60 per contract if the price of the underlying plunges 10.7% in the next five weeks to trade below $67.50 at October expiration. Shares in FedEx last traded below $67.50 back in August 2009. The stock is down 23.4% off its multi-year high of $98.66 on July 7.

IR - Ingersoll-Rand PLC – Call options on the maker of industrial machinery are popular with traders positioning for shares in Ingersoll-Rand to appreciate. The stock is up 4.2% at $36.36 in early-afternoon trade, and some call buyers are primed to profit should shares extend gains through October expiration. Ingersoll-Rand is scheduled to report third-quarter earnings on October 20, one day before October contract options expire. Traders purchased in- and out-of-the-money calls in the September contract, which are more than half way through their final trading session. Looking out at October contract calls, investors appear to be positioning for shares in Ingersoll-Rand to move sharply higher in the next five weeks. The Oct. $38 and $40 strike calls are most active, attracting volume in excess of 2,100 and 4,900 contracts, respectively. Traders purchased at least 1,600 of the Oct. $38 strike calls for an average premium of $1.32 apiece. Buyers of the calls profit if shares in IR top the average breakeven price of $39.32 at expiration next month. Traders paid an average premium of $0.91 a-pop for more than 3,500 of the Oct. $40 strike calls. Bulls long the higher-strike calls make money at expiration if shares in Ingersoll-Rand surge 12.5% over the current price of $36.36 to exceed $40.91. The rise in demand for options on the stock helped lift IR’s overall reading of options implied volatility 10.6% to 53.6% this afternoon.

XLK - Technology Select Sector SPDR ETF – The XLK, an exchange-traded fund that tracks the performance of the Technology Select Sector of the S&P 500 Index, popped up on our scanners early in the trading session after sizable blocks of put options were purchased on the fund. The price of the underlying fund rallied 0.60% to $24.95 in early-afternoon trade, but put buyers are prepared in the event of a sharp pull back in the five weeks remaining to October expiration. More than 31,500 puts changed hands at the October $23 strike against previously existing open interest of just 762 contracts. It looks like most of the puts were purchased outright for an average premium of $0.34 a-pop. The buyer or buyers of the contracts may betting on a sharp move lower in XLK shares in the near term, or could be building up downside protection to hedge exposure to the sector or a long position in the underlying fund. Profits are available on the long put stance should shares in the XLK surrender 9.2% of their current value to trade below the breakeven price of $22.66 at expiration day. Shares in the XLK dipped below $22.66 as recently as August 22.

CSTR - Coinstar, Inc. – Shares in the provider of Redbox DVD rental kiosks and self-service coin-counting machines are down 1.6% today at $47.71 as of 12:30 pm on the East Coast, and at least one options strategist is prepared to see those losses widen in the near future. Sizable prints in October contract put options suggest the trader may see the stock losing more than 15.0% by expiration next month. It looks like the investor purchased the 2,500-lot Oct. $40/$45 bear put spread for a net premium of $1.20 apiece. The put-spreader profits if shares in Coinstar shave 8.2% off their current price to breach the effective breakeven point on the downside at $43.80 at expiration. Maximum potential profits of $3.80 per contract pad the investor’s wallet come expiration should the price of the underlying drop 16.2% to trade below $40.00. Coinstar reports third-quarter earnings on October 27, roughly one week after the puts will have expired.


Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Caitlin Duffy

Equity Options Analyst


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This entry was posted on Friday, September 16th, 2011 at 2:25 pm and is filed under Appears on main page, Uncategorized. You can leave a response, or trackback from your own site.

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