American Express (AXP) reports Q4 results tonight after the close. The options market is implying about a 3.8% one day post earnings move, which is shy to its 4 qtr average one day move of about 8%, but basically inline with the 10 year average move. With the stock around $77.50, the Jan (tomorrow expiration) 77.50 straddle is offered at $3, if you bought that and thus the implied move for earnings you would need a rally above $80,50, or a decline below $74.50 by tomorrow’s close to just break-even, or about 3.8%.
Shares of AXP have outperformed the broad market since the election in early November, up about 15%, vs the S&P 500 (SPX) up 6%, and peers Mastercard (MA) up 4% and Visa (V) actually down a bit. After a multi-year period of under-performance, the stock broke out in Nov merely on the prospect of a stronger economy, and the stock has since been on a slow grind higher:[caption id="attachment_69611" align="aligncenter" width="600"] AXP 1yr chart from Bloomberg[/caption]
As for that prior under-performance, it all started in 2014, from very near all time highs following their failure to secure their long running exclusive with Costco (COST), which led to nearly a 50% peak to trough decline to the 2016 lows. Since then, the stock has risen more than 50% and importantly broken that steep downtrend from late 2014. But it is approaching technical resistance near $80, with the next real technical support level the Nov breakout level near $70:[caption id="attachment_69613" align="aligncenter" width="600"] AXP 5yr chart from Bloomberg[/caption]
Despite the valuation gap between AXP (trades 13x vs MA & V at 29x & 25x respectively). Shares of AXP appear a bit extended with the risk reward for new longs not particularly favorable when you consider consensus estimates are calling for 2017 eps to decline 5% and sales to be flat, vs double digit eps and sales growth expected for both MA & V.
Short dated options prices appear rich, with 30 day at the money implied volatility (blue below) just above 25%, while 30 day realized volatility (white below, how much the stock has been moving) just below 15%, one of the widest gaps over the last year, implying that no movement, or that below the implied move would be murderous for those long premium in the name:[caption id="attachment_69615" align="aligncenter" width="600"] Bloomberg[/caption]
For those looking to play for a pullback following earnings, similar to what we saw from the moneycenter banks following their rally into earnings, but without risking a ton of elevated premium is a put fly that starts in the money:
AXP (77.30) Buy the Jan 77.5/75/72.5 put fly for .60
- Buy 1 Jan 77.5 put for 1.65
- Sell 2 Jan 75 puts at .60 (1.20 total)
- Buy 1 Jan 75 put for .15
Rationale – This trade idea risks just .60 with the potential for up to 1.90 in gains if the stock is 75 on tomorrow’s close. It breaks-even at 76.90, just .40 below where the stock is trading. The most it can lose is .60 if the stock is above 77.50 on tomorrow’s close. Profits trail off below the mid point of the fly, but it can;t lose money on a move lower until 73.10, so it provides a fairly wide profitability range below. Of course, this trade is as binary as it gets, as it can either be profitable tomorrow, or completely worthless if the stock goes higher on better than expected results. So this is only for those willing to risk .60 overnight.