Options Update: American Express Sees Heavy Put Activity
Hello, my name is Mark, and I’m an option-holic. I confess, I just can’t quit looking at intraday option activity and feel this inherent need to write about it. I begged Joe to allow me the indulgence of impaling all of you with my thoughts on today’s intraday option activity, and he didn’t put up much of a fight.
Okay, that may be a bit of an exaggeration, but Joe is out for a couple of days, so you just have to put up with me, a few bad puns, and maybe some option education while we are at it. So, on with the show.
With financial firms squarely in the crosshairs of investors, analysts, authors, newspeople, and Main Street alike, it does not surprise me to see the options landscape littered with carcasses of put trades on financial firms. Wading through the carnage of financials on our Intraday Volume Explosion List, I found mega-financial American Express
(
AXP |
Quote |
Chart |
News |
PowerRating). It appears that put players simply could not leave home without their bearish positions on AXP, as put activity has increased roughly 4 times the norm. The November 32.50 put (AXP WT) has taken the brunt of this activity, with 5,564 total contracts changing hands.
Option Players Express Themselves
I decided to dig into the numbers a bit, since this activity is what caught my eye today. I found that 4,309 of the contracts crossed the tape in 1 transaction shortly after 10 AM EST. The good news is that this was a rather straight-forward transaction, as the gigantamungo block of contracts crossed at the bid price of $3.10. Let’s take a look at the numbers a bit here.
Let’s take the price of $3.10 and multiply that by 100, that gives us $310. Now, take the $310 and multiply it by 4,309, giving us $1,335,790. For those unfamiliar with a put sell (also known as a put write), it is a strategy that involves selling a put, which places upon the seller the obligation to buy the shares at the strike price if the put is exercised. Put writers typically sell puts below the market to either acquire a stock at a price below current market prices or to get paid while they wait by retaining the option premium when the put expires worthless. Put writers should want to own the stocks they sell puts on, as they are incurring the obligation to buy the stock at a certain price up until that option’s expiration. (This definition was taken from our glossary.)
Basically, we have someone betting that the stock will not drop below 32.50; however, if it does, this institutional investor (which is an assumption on my part) could take that $1,335,790 and purchase AXP. Bottom line, someone sells a put when they believe the stock will not drop below the sold strike price. If the stock does drop below the strike, the purchaser then buys back the stock with the premium received.
In the Express Lane Lower
Technically, it is tough to believe that AXP is going to rally much. The stock faces solid overhead resistance in the form of its 10-month moving average. This trendline has provided resistance since October 2007, a 52-week period that has seen the shares lose 40.9%. This trendline is currently working its way through the 41 region, placing it 19.5% higher than AXP’s current price of $33. Yes, there is resistance, but the stock has some room to run higher.
What about the 32.50 level? This is the line of demarcation for our hypothetical put seller, and it seems that our seller may have made a very smart decision. Looking at the chart below, notice that September was the first month that the stock ticked below 32.50 since May 2003 (when the stock hit a monthly low of $32.39). Two days into October, AXP’s low stands at 32.22, but the stock is now positioned back above the 32.50 level – allowing the level to act as support. Bottom line, our hypothetical seller needs to keep a very watchful eye on the stock in order to maximize this play.
Riding the Bearish Express
Analysts are firmly planted in bearish ground when it comes to AXP. The credit king receives 2 “strong buys,” 1 “buy,” 6 “holds,” 1 “sell,” and 2 “strong sells.” Upgrades from this bunch could go a long way to helping AXP rally, and remember that the stock has plenty of room between it and its 10-month moving average. Sure, there is more immediate potential resistance from AXP’s 10-week moving average, but this trendline has failed recently – so let’s set the 10-month as the most immediate potential resistance. With all of that room for upgrades, our hypothetical put seller is probably feeling pretty good about him/herself.
The Verdict?
It could take some time for AXP to completely snap out of its current downtrend, but I like the fact that the 32.50 level is holding its own. Moreover, this is a November contract, leaving a skosh of time for the stock to test 32.50. In my opinion, selling the 32.50 put was a gutsy (considering the current market environment and AXP’s year-to-date loss of 32%), but potentially profitable play.
Newly revised and updated, Bernie Schaeffer’s home study program, “10 Days to Successful Options Trading,” provides a foundation for your options trading success. Includes easy-to-follow guide, CD, DVD, and a special report — Click here to learn more.
Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.