Name That Trade $AXP: Options Market Expressing Little Concern

by Dan April 10, 2015 1:03 pm • Commentary

The fact that shares of American Express (AXP) are down almost 15% on the year puts it in the lead for the worst performing stock in the Dow Jones Industrial Average.  The reasons for the decline are well known, with half of the losses coming since the announcement that Costco (COST) would be discontinuing their long running exclusive with AXP in mid February, but its also important to note that prior to the COST news the stock was already in the midst of a fairly steep draw-down to start the year:

AXP 1yr chart from Bloomberg
AXP 1yr chart from Bloomberg

Next Thursday after the close the company will be reporting their Q1 results, and the options market is implying about a 2% one day move, which is a tad greater than the 4 qtr average move of about 1.75%.  One reason for the low implied move is the fact that the company recently held their annual analyst meeting on March 25th where management went into great detail about their current business and challenges going forward (stopping short of offering outlook).

The stock screens as cheap trading below a market multiple, but with expected eps and sales growth of only 1-2%, dividend yield of only 1.3% faced with replacing sales/earnings from the COST deal next year, I think it is safe to say the stock could be a value trap.

In the near term, sentiment seems horrible, while options prices seem cheap.  Thirty day at the money implied vol 19% seems fair to cheap:

[caption id="attachment_52674" align="aligncenter" width="600"]AXP 1yr chart of 30 day at the money implied vol from Bloomberg AXP 1yr chart of 30 day at the money implied vol from Bloomberg[/caption]

I think it is a tad to early to make an assessment on trades into the Thursday print, but I would say that owning the move seems fairly harmless as it is not likely to come in between now and Thursday.  With the stock at $79.65, the April 17th 80 Straddle (the 80 call and the 80 put) is offered at about $2.05, or about 2.5%.  If you owned that you would need a move above $82.50 or below $77.50 by next Friday’s close to make money. That’s with the earnings event.  For those of you who scalp stock against their long premium options trades this could be a pretty decent candidate.