I am going to keep this real simple, AXP is up nearly 20% on what looks almost like a straight line since April 17th, and up 33% ytd. AXP is trading at 16x this years expected earnings that are only supposed to grow 9%, and 14x expected 2014 earnings that analyst see growing at 11%. Sales are expected to grow 4% and 6% respectively.
While valuation should not be the only catalyst for a trade, the price action appears to be getting a tad tired when you look at the one month chart and the 4 consecutive failures at the $77 level, which also coincides with the all time highs.[caption id="attachment_26580" align="aligncenter" width="568"] from Bloomberg[/caption]
Volatility: Implied Vol has ticked up in AXP recently despite (or because of) its attempts at new highs. This is very similar to what we started noticing in IV across the entire market in the past few weeks. The recent uptick in AXP vol has it at about the same levels it saw going into its last earnings. Here’s a look at the past year of IV30 vs HV30:[caption id="attachment_26581" align="aligncenter" width="553"] from LiveVol Pro[/caption]
Historically it’s not at super high levels but this fact made us lean towards something near term for a reversal rather than being stuck with something a few months out that could have a IV pullback affect it negatively.
Trade: AXP ($76.78) Bought the June 77.5/ 72.5 put spread for 1.55
-Bought 1 June 77.50 put for 1.85
-Sold 1 June 72.50 put at .30
Break-even on June Expiration:
-Profits btwn 75.95 and 72.50, make up to 3.45, with max gain of 3.45 at 72.50 or below
-Losses of up to 1.65 btwn 75.95 and 77.50 with max loss of 1.55 above 77.50
Payout Diagram:[caption id="attachment_26586" align="aligncenter" width="506"] from TradeMonster[/caption]
Trade Rationale: So I Have a stock that has dramatically out-performed its peers, trades at a historically rich multiple, appears to be losing a tad of momentum, is amazingly overbought, and the vol looks very reasonable. Oh and I hate the stock market up here. So this is a trade for a quick pullback and that is why we chose June and an ITM spread with 45 deltas. We’re not giving up a ton as far as premium goes (it’s in the money by 80c so only 75c in premium) and the trade will go quickly to more than 50 deltas on any drop in the stock.