Enter FDX Spread

A Big Earnings Move Could Return Tidy Profit

By Bryan Bottarelli
Monday, June 19, 2006 3:11 PM EST
Mon, 19 Jun 2006 20:11:00 GMT

PLAY: Buy the FDX July 120 Calls (FDX GD) at or under $0.70, good for the day. Current bid/ask spread is $0.55 to $0.60. Also buy the FDX July 100 Puts (FDX ST) at or under $0.70, good for the day. Current bid/ask spread is $0.60 to $0.70.

Dear Bottarelli Research Member,

Today’s selling pressure highlights the reason why we entered into protective DJX puts this morning. After a strong two-day rally, the markets are facing one of those critical “line in the sand” moments where the next significant move could dictate the next few weeks of trading action.

As it stands now right now, the bulls tried to extend their gains from late week, but their buying power was quickly exhausted which lead to a new wave of selling pressure. Virtually every stock I watch is in the red today, but your DJX July 110 Puts (DJV SF) have moved up from $1.65 to $2.00. This 21% gain in a matter of hours serves to soften the blow as our upside positions in LVS and PEP drift lower.

For the time being, I’d like to maintain all three positions to see how the trading action goes this week. As the more speculative of the two upside plays, I also may decide to add to the LVS July 70 Calls (LVS GN) as the stock tends to move in large increments. In fact, you can clearly see what I’m talking about today, as the LVS July 70 calls have traded in a range from $1.95 to $3.70. I’ll let you know when it’s appropriate to add to the position.

For right now, I think it’s a good idea to enter into the FedEx earnings play I spoke of this morning by taking a cheap position on both the call and the put side of the stock. Since this week is slow on both the economic data and the earnings data front, I think the markets will place a larger emphasis on Wednesday’s earnings results from both FedEx (FDX – NYSE) and Morgan Stanley (MS – NYSE) simply because there’s a lack of anything else of significance to focus on. Since FedEx stock is double that of Morgan Stanley, the cheap FDX options offer you more bang for your buck. So here’s what I’d like to do:

PLAY: Buy the FDX July 120 Calls (FDX GD) at or under $0.70, good for the day. Current bid/ask spread is $0.55 to $0.60. Also buy the FDX July 100 Puts (FDX ST) at or under $0.70, good for the day. Current bid/ask spread is $0.60 to $0.70.

If Fed Ex stock moves up or down $10.00, the calls or puts could increase up to $3.00. This could potentially give you a 100% (or more) gainer off your total basket price of $1.40. Remember to buy each side on a one-contract for one-contract basis. Then, look for a big-time stock move on Wednesday!

Lock and load,

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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