Options Update: American Express Targeted by Heavy Put Volume
The Fed waived the normal 30-day waiting period on the application. “In light of the unusual and exigent circumstances affecting the financial markets and all other facts and circumstances, the board has determined that emergency conditions exist that justify expeditious action on this proposal in accordance with the provisions of the (Bank Holding Company) Act and the board’s regulations,” the Fed said.
While the move is expected to improve AXP’s borrowing costs and access to government money, traders have reacted negatively, sending the stock nearly 6% lower. Furthermore, the options pits are buzzing with put activity, as more than 20,000 AXP puts have changed hands so far today, more than doubling the stock’s average daily put volume and placing the shares on our Intraday Volume Explosion List. However, it was the more than 5,000 contracts that traded at AXP’s December 22.50 strike that caught my eye.
The Anatomy of a American Express Put Position
Diving into the options data, I noticed that the majority of today’s volume has traded at the ask price. Combine this activity with the fact that today’s volume at the December 22.50 put has exceeded open interest at this back-month strike, and AXP could be the target of buy-to-open put positions. As such, I will be running with a put-buying theme this afternoon.
Specifically, a block of 1,467 December 22.50 AXP puts traded at the ask price of $3.10 just before 10:00 a.m. Eastern time. The total outlay for this position would be $454,770 — ($3.10 * 100)*1,467 = $454,770. For this trade to reach breakeven, AXP would need to fall about 19% to $19.40 per share from yesterday’s close at $23.98 before the options expire on December 19. The maximum loss on this position is limited to the initial investment of $454,770.
By entering this trade, the investor is indicating that he expects AXP to plunge during the next several weeks. The shares are off to a solid start, falling nearly 6% at last check, but let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.
The stock’s technical backdrop appears very supportive for an AXP December 22.50 put. Since January 2008, the stock has fallen more than 53% under resistance at its 10-week and 20-week moving averages. The shares have even pulled back below short-term resistance at the 25 level and their 10-day and 20-day moving averages following this morning’s news. However, there is the matter of short-term support in the 22 area, as well as long-term support in the round-number 20 region. A breach of the 22 level would be a positive sign for a December 22.50 put, but the shares would need to extend that momentum past 20 in order for the aforementioned position to achieve a profit.
The Sentiment Drivers
Unfortunately for contrarian investors, AXP’s sentiment backdrop provides little in the way of inspiration for a continued decline. In the options pits, the security’s Schaeffer’s put/call open interest ratio (SOIR) of 1.21 ranks in the 97th percentile of its annual range, indicating that speculative options traders have been more bearish only 3% of the time during the past year. Meanwhile, Zacks.com reports that 9 of the 12 analysts following AXP rate the shares a “hold” or worse. Both of these sentiment indicators underscore the negativity already present for AXP, lessening the chances of additional bears piling onto the equity. Luckily for December 22.50 put traders, this sentiment is also par for the course on such an underperforming equity, thus lessening the contrarian implications of such negativity.
On the surface, a put position on AXP appears to be quite fool proof – especially given the stock’s abysmal technical performance this year. However, looks can be deceiving, and with the company able to access funds more easily due to its bank-holding status, and extended decline in the shares is far from certain. If I had to layout a specific concern for a December 22.50 put position, it would be the potential for technical support in the 20 region. Even though a pullback to the 20 level would result in about an 11% decline from AXP’s current levels, it still would not be enough for today’s example to reach breakeven, let alone profitability.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.