Happy Friday to Barchart readers everywhere. It is for this Canadian.
My Toronto Maple Leafs finished off a feisty Ottawa Senators team in the Battle of Ontario. The Buds move on to the unenviable task of beating the Florida Panthers, the reigning Stanley Cup champions. While they’re in tough, today is a day of celebration.
In today’s commentary, GXO Logistics (GXO) had the 10th-most unusually active option in Thursday trading with a Volume to Open Interest (Vol/OI) ratio of 43.64.
The top unusually active option is Mattel (MAT) with a Vol/OI ratio of 378.52. Investors have tariffs and toys on their minds.
As for GXO, the options play that comes to mind is a vertical spread, a bet that its share price will move moderately higher or lower by expiration. It’s a good bet for risk-averse option investors because it limits risk at the expense of unlimited upside.
The question on my mind: Is the May 16 $32.50 put the foundation for a bear put spread or a bull put spread? Here are my thoughts.
Have an excellent weekend!
GXO’s Opportunity
GXO Logistics, as its name implies, provides advanced logistics solutions to more than 1,200 global customers from over 970 facilities worldwide.
Spun off from XPO Logistics (XPO) in August 2021, XPO shareholders received one new share of GXO for every share of the parent. GXO stock has underperformed XPO by a considerable amount since the spinoff. Over the past year, GXO stock is down 28%, trading at its lowest level since October 2022.
Why should investors consider GXO stock other than trading at one of its lowest levels since its spinoff nearly four years ago?
One word: Tariffs.
The supply chain is in dire straits given the tariffs implemented by the White House. While no one knows how this turns out, every business of a reasonable size that imports and exports products and services is looking to rejig the supply chain to limit the additional costs.
GXO works with 30% of Fortune 100 companies. Apple (AAPL) is one of the 100; it’s also a GXO customer. In its Q2 2025 conference call yesterday, CEO Tim Cook said the tariffs could raise its Q3 2025 costs by $900 million, or $0.06 a share.
You can be sure Tim Cook and his management team are turning over every supply-chain stone with the help of GXO. That’s sure to help the logistics provider’s revenue growth.
The company estimates that its total addressable market in North America and Europe is $430 billion. It has 5% of the $130 billion in outsourced logistics spend on both continents. The extra $300 billion is insourced logistics for which it can win contracts.
The opportunity is significant.
GXO’s Fundamentals
The key to GXO’s success is its asset-light business model, which enables it to generate significant free cash flow.
The company reports Q1 2025 results on May 8, eight days before the May 16 $32.50 put expires.
In February, its 2025 guidance suggested converting 27.5% of its $850 million in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). That’s $234 million.
Its current enterprise value of $9.03 billion is a free cash flow margin of 2.6%. On the surface, that’s far too low for my liking. I look for at least 4%, preferably higher, but you should consider it in context with its historical norm.
In 2024, its free cash flow was $251 million, $51 million less than 2023, but up from $200 million in 2022, $205 million in 2021, and $111 million in 2020.
I want to be more positive about GXO, but acquisitions hide the reality that its cash flow generation isn’t all that and a bag of chips. It’s mediocre, at best.
That explains why its shares have failed to move above $60 in the past three years.
It’s a Bear Put Spread?
Not so fast.
Although I wouldn’t invest in GXO, that doesn’t mean the May 16 $32.50 put doesn’t set up for a bull put spread.
The bear put spread is a bet that the share price decreases in value over the next 15 days. The bull put spread believes the opposite; it will rise in value.
Given that GXO stock has fallen 28% over the past year, including 8% over the past month, it is up nearly 19% since hitting a new 52-week low of $30.46 on April 9. It’s got momentum.
Or, it could be a dead cat bounce?
But as I said in the intro, both limit your risk.
The example below is a bear put spread with the May 16 $32.50 put long and May 16 $30 put short.
While the odds of profiting from this trade are just 15.6%, your maximum loss is just $45, while your maximum profit is $2.05, which assumes the share price is trading below $32.05 at expiration.
I use the May 16 $32.50 put short in this second example.
This example shows two long strike prices: $37.50 and $35, the former in the money, and the latter out of the money. With a 42.4% profit probability and a risk/reward of 0.75 to 1, you’ll make $285 should the share price be below $35.35 in 15 days.
If you flip the two examples above to bull put spreads, your maximum profits would be $20 with the $32.50 put long, and $1.15 with the $32.50 put short and the $35 strike long, but your profit probability is 50/50.
Of the two potential strategies, I like the bear put spread with the May 16 $32.50 put long and $30 put short.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
