Options Update: American Express Racks Up Heavy Put Volume
It’s no secret that Wall Street’s frustration with Treasury Secretary Timothy Geithner’s version of the Troubled Asset Relief Program (TARP II) has been taken out on the financial sector. Since Geithner officially announced the plan earlier this week, the Select Sector Financial SPDR, XLF
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PowerRating) has fallen more than 10%. What’s more, troubled financial services firm American Express {AXP|AXP] has outpaced the sector’s decline, shedding nearly 13% since Monday.
AXP is back in focus today, as options traders appear to be picking up the pace in acquiring put options on the security. Specifically, the International Securities Exchange and Chicago Board Options Exchange’s 10-day put/call ratio of 1.65 indicates that puts bought to open have easily outnumbered calls purchased during the past 2 weeks. Additionally, this ratio ranks above 65% of all those taken during the past year, underscoring a preference for bearish bets on AXP.
In today’s activity, more than 26,000 AXP puts have changed hands, more than tripling the stock’s average daily put volume and placing the security on our Intraday Volume Explosion List. More than half of this volume traded at the March 15 strike, with 2 large blocks crossing at the ask price.
The Anatomy of a American Express Put Position
Specifically, 2 large blocks of March 15 puts totaling 12,500 contracts crossed the tape at 10:10 a.m. Eastern time at the ask price of $1.50. Assuming that these contracts were all placed by the same trader, the total outlay for this position would be $1,875,000 — ($1.50 * 100)*12,500 = $1,875,000. For this trade to reach breakeven, AXP would need to plunge about 17.5% to $13.50 per share from the stock’s Wednesday close of $16.36 per share before the options expire on March 20. The maximum loss on this position is limited to the initial investment of $1,875,000.
By entering this trade, the investor is indicating that he expects AXP to fall sharply during the next several weeks. The position has started on the right foot, with AXP down more than 4.5% at last check. That said, let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.
Getting Technical
Technically speaking, AXP has been locked in a steep descent since May 2008. During this time frame, the shares have plunged more than 70% under resistance at their 10-week and 20-week moving averages. The former of these trendlines has taken up residence in the 18 area, home to former technical support that could now provide stiff resistance to any rally attempts from the equity. What’s more, AXP is also battling resistance from its 10-day and 20-day moving averages, which are currently perched in the 16.50 area. The equity has closed only 2 sessions above these trendlines since early January.
On the other hand, the shares are clinging tightly to support in the 15 area. This region bolstered the shares in late January, and could provide a floor for AXP during the short-term.
The Sentiment Drivers
Sentiment toward AXP is understandably bearish. Short-term options players have been more negatively aligned only 4% of the time in the past year, as the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 1.54 ranks above 96% of all those taken during the prior 52 weeks. Meanwhile, 13 of the 17 analysts following AXP rate the shares a “hold” or worse, according to Zacks.
However, short sellers have largely ignored AXP. In fact, the roughly 29.3 million shares sold short account for a mere 2.5% of the stock’s total float, and could be repurchased in less than 2 days at the AXP’s average daily trading volume. Along these lines, the Street’s disappointment with TARP II and the stock’s long-term decline could bring these bears back to the table, potentially increasing selling pressure on the shares.
The Verdict?
While there is already a wealth of pessimism levied against AXP, the stock’s poor technical performance is largely deserving of this negativity. What’s more, there is still lingering bullish sentiment among Wall Street analysts, and a lack of attention from the short-selling community. Should the shares breach key technical support at the 15 level, it could further confirm the current negative sentiment readings and draw more sellers into the picture. As such, the prospects for a purchased March 15 put look pretty good at the moment.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.