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FDX: Wish I Could Short the Post Office

Stocks in this article: FDX

Over the weekend news came out that the U.S. Postal Service is in trouble. It needs to lay off 220,000 workers by 2015 but are prohibited from doing so by union contracts. It is required to pay billions into a retirement fund and does not have the cash to do so. In addition, the USPS is pressuring its outside contractors to reduce costs and is seeking Congressional approval to do these things that by contract it is not allowed to do. It makes me wish I could short the Post Office.

Although shorting the USPS is not possible, one can short FedEx (FDX), a large Post Office contractor. The company is likely to lose part of its billion dollar contract if it does not volunteer to cut costs. To play this I like the idea of a vertical call spread.

Trades: Sell to open FDX October 80 calls at $1.46 and buy to open FDX October 82.5 call for $0.95.

The net credit on this spread is $0.51 which is our potential maximum profit. The risk is strictly limited to the 2.5 strike price differential less the credit, or $1.99. The net delta on this trade is -.08, so this is like being short eight shares of the stock. One can consider that in deciding how large a position to put on. The trade will also benefit from a favorable theta burn of .006 per day.

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At the time of publication, Phil McDonnell held no positions in the stocks or issues mentioned.

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