FedEx publishes its results next week. Here's how to play.

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FedEx

publishes its quarterly results Tuesday – and good luck trying to predict how the stock will react.

The shipper is expected to record a profit of $ 3.17 per share during its first fiscal quarter, for a $ 17.1 billion business figure, according to FactSet. But knowing whether FedEx (ticker: FDX) will beat or fail has not always been a big help. In recent years, equities have declined after exceeding Wall Street's expectations and trading higher after management offered poor earnings guidance.

In fact, trading income reports are a monthly bet. In this type of bet, several things must happen before investors can cash. To generate a quarterly profit, investors must not only infer what a company will report, but also how the market will react to the news. For example, FedEx shares jumped 3% in July, even after management announced that fiscal year 2020 earnings would fall by a few percentage points, due in part to a weaker economy and uncertainty of trade.

This does not seem very good, but the low earnings forecasts were probably already reflected in the stock price. Ben Hartford, an analyst at Baird, qualified the quarter and explained the stock price performance "Below consensus, but well below investor expectations."

However, while it is difficult to predict quarterly results, it is much easier to predict volatility after the results are released. FedEx shares increased or decreased by 6% on average after the last four quarterly reports. The stock has been more volatile in recent times due to the macroeconomic weakness mentioned by management in July, as well as internal problems such as the slow integration of TNT Express, purchased by FedEx in 2015.

Since the last FedEx report in July, industrial production has dropped, while the trade war between the United States and China continues. As a result, this is a safe bet – or should we say safer – that the FedEx results will contain a kind of surprise that will make its stock volatile after profits.

But that's not what the options market thinks. "The [FedEx] options are prices in a move of about 3%, "a Wall Street derivatives trader said Barron. "The options therefore account for about half of recent history." This is a deplorable sentiment for the trader, and this could be an opportunity for aggressive investors who want to play the quarter with FedEx with options.

A stock option is a contract that gives the holder the right to buy or sell a stock at a fixed price over a period of time. The cost of an option depends on many factors, but stock volatility is an important factor in options valuation models. The more volatile an action, the more valuable the options are. A stock that fluctuates a lot is more likely to trade above or below the strike price in a typical option contract. This is why the options trader estimates that an implied 3% move after earnings is too conservative. He expects more volatility after the quarterly report.

An options trader would recommend using an "overlap" – an option transaction in which investors buy a put and call option with the same expiration date and the same price of exercise – to position oneself in the face of increasing volatility. But if you are a long-term investor, you can simply buy the shares directly. Barronwrote positively on FedEx on July 19, saying that fears about
Amazon.com

The ambitions of the shipping company (AMZN) have been exaggerated. FedEx only gets a small portion of Amazon's sales, and online shipping volumes have increased enough.

We see no reason to change our minds, no matter what happens on Tuesday. FedEx has gained 3.5% since the publication of our article, while the Dow Jones Industrial Average has gained 0.2%.

Write to Al Root at [email protected]