Shipping giant FedEx Corporation (FDX) is set to report earnings for the fiscal second quarter on Dec. 16 after the market closes. FedEx stock is currently in a short-term downward trend and is trading just below its 20-day moving average. Option traders appear to be positioning themselves for a negative earnings result, as there is a higher-than-average number of put options currently in the open interest.
In anticipation of FedEx's earnings report, option volume and implied volatility has been surging. The increase in implied volatility leads to an increase in option premiums, as traders place their bets on their assumptions of the outcome of the earnings results. Current trading volumes and open interest reflect a bearish sentiment toward FedEx earnings. That's because there is a higher percentage of puts in the open interest compared to the 52-week average.
Supply chain disruptions have been at the core of many companies' earnings results, and as one of the major shipping providers, FedEx will likely be no different. Nearly every industry is facing headwinds of increased costs and labor shortages, which puts the focus on company management to maintain or improve the bottom line. Analysts are forecasting $4.29 in earnings per share (EPS), down 12% on a year-over-year basis. Revenue, meanwhile, is expected to rise 8.9% year over year to $22.42 billion.
- FedEx stock is in a slight downward trend ahead of the company's fiscal second quarter earnings report.
- Analysts expect FedEx to announce $4.29 in EPS and $22.42 billion in revenue.
- Relative open interest percentages skew bearishly.
- Volatility-based support and resistance levels allow for a larger move to the upside.
Chart watchers can gain valuable insight with a combination of technical analysis of share price movement together with details about recent option activity. The chart below illustrates the recent price action for the FedEx shares as of Wednesday, Dec. 15.
This chart is looking at the share price activity of FedEx as of the previous earnings report, using one-day candles. The blue lines are a historical volatility range formed by 20-day Keltner Channel indicators, which depict price levels that represent a multiple of the average true range (ATR) for the stock. ATR is a standard tool for depicting historical volatility over time.
The red rectangle captures a five-day period of trading after the prior earnings report, which could influence the outlook of option traders and investors toward the upcoming earnings results. After the last earnings report, in late September, FedEx stock fell more than 9% the next day and continued on a relative downward trend until October.
The horizontal orange line represents a potential double bottom between Sept. 30 and Oct. 13, a date that also appears to represent the beginning of an upward trend, as illustrated by the green arrow. This trend saw the FedEX share price rise to an extreme high of the volatility range, peaking in mid-November.
The mid-November high of around $255 begins the start of a downward trend, highlighted by the red arrow. The bottom of this trend is punctuated by the one-month low of roughly $227 in early December. After rising back above the 20-day moving average, the share price currently appears to be in a downward channel, highlighted in blue.
The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.
Recent trading volumes of FedEx options are split nearly even between calls and puts. However, trading volumes alone can only paint a portion of the picture. Open interest analysis can provide greater context into the sentiment of option traders. The current open interest for FedEx features roughly 164,000 puts compared to 154,400 calls. A casual glance suggests that option traders are slightly bearish. However, further analysis can grant even further insight.
Current option straddle pricing, which involves simultaneously buying one each of at-the-money put and call, implies a 6.5% move in FDX stock as a result of earnings. For the Dec. 17 expiration date, which is the next expiration for options included in the FedEx earnings report, the single highest open interest is for the $250 call option, with 8,100. This out-of-the-money option represents a 4% upside toward FDX earnings.
Out-of-the-money put option open interest declines at a much slower rate than that of out-of-the-money calls. This could mean that option traders are willing to place speculative bets on the potential downside outcome of FedEx earnings.
The current overall put option open interest percentage is much higher than its 52-week average. This is to be expected before an influential event such as earnings; however, it is notable that the call option open interest percentage, while elevated, is more than 20 percentage points lower than the put open interest percentage.
The chart below illustrates at-the-money option prices expiring this week. The green-framed box represents the pricing that call option sellers are offering, and it implies a 34% probability that FedEx shares will close inside this range by the end of the week if prices go higher. The red box illustrates the pricing for puts, with a 34% chance if prices go lower after earnings.
Chart watchers should recognize that, while the probabilities are the same, the green box is larger than the red box. That's because at-the-money call option pricing is $0.11 higher per contract than at-the-money put pricing, after accounting for intrinsic value. Calls could currently cost more than puts because of Wednesday's 0.3% share price increase.
The Bottom Line
The recent downward trend of FedEx's share price could be contributing to the recent higher-than-normal percentage of put options in the open interest. It's also possible that this elevated put percentage could be in anticipation of an unfavorable earnings result.