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Is FedEx Poised to Pop?

Breaking down a bull call spread on FDX

by 10/9/2012 10:07 AM
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The shares of FedEx Corporation (NYSE:FDX - 86.57) have spent most of 2012 on a journey of lower highs and lows. However, it looks like one options trader is betting on the stock to break north of this range relatively soon.

During the course of Monday's session, the delivery concern saw roughly 16,000 calls cross the tape -- more than double its average daily volume, and about five times the number of FDX puts exchanged. Most of the action centered around the October 90 and 92.50 calls, which saw symmetrical blocks of more than 5,300 contracts change hands. The 90-strike calls traded at the ask price of $0.23, while the 92.50-strike calls crossed at the bid price of $0.05. Considering open interest skyrocketed at both strikes overnight, we can assume the strategist constructed a bull call spread for a net debit of $0.18.

By purchasing the October 90 calls to open, the buyer is expecting FDX to surmount the $90 level -- a feat not accomplished since mid-September -- within the next couple of weeks. However, in order to trim both the initial debit (which represents the maximum risk) and breakeven rail, the investor simultaneously sold the higher-strike calls. As such, he'll now break even if FDX topples the $90.18 level (bought call strike plus net debit), but his reward is capped at $2.32 (difference between strikes minus net debit), no matter how far FDX should soar north of $92.50.

From a sentiment standpoint, bullish bets are par for the course for FDX. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day call/put volume ratio stands at 1.96, indicating that traders have bought to open nearly two calls for every put during the past couple of weeks. In fact, this ratio registers in the 77th percentile of its annual range, pointing to a healthier-than-usual appetite for long calls of late.

As such, the security's Schaeffer's put/call open interest ratio (SOIR) now rests at a 12-month low of 0.81. Or, in simpler terms, short-term options players haven't been more call-heavy at any other time during the past year.

That optimism isn't limited to the options pits. Currently, FDX boasts 15 "strong buy" endorsements from analysts, compared to six lukewarm "holds" and not a single "sell" or worse rating. Plus, the consensus 12-month price target on the stock stands at $101.43, in territory FDX hasn't charted since late 2007.

In early trading, the shares of FDX have tacked on 0.3% to wink at the $86.57 level. The security has added about 2.3% so far in October, but is staring up at its 10-week and 20-week moving averages, which have halted most of FDX's rally attempts since mid-February.

Weekly Chart of FDX since January 2012 With 10-Week and 20-Week Moving Averages

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