Last week we took a look at the breakouts in online payment companies and the new highs in credit card companies and wondered why American Express (AXP) hadn’t joined the party. We detailed a simple call purchase in AXP out in October that looked to take advantage of at least a run to its previous highs and hopefully a breakout above that following Q3 earnings. It only took a few days to breakout from its recent consolidation and now those previous highs are in sight. First, let’s recap the trade, from Sept 15th:
AXP ($86.80) Buy Oct 87.50 call for $1.40
Break-Even on Oct Expiration: Unlimited profits above 88.90 (up 2.3%). Losses up to 1.40 below 88.90 with a max loss of 1.40 below 87.50.
Th stock was 86.80 at the time, now it’s 89.20. With that move the trade is worth nearly a double, or about 2.60. One way to take some profits on the trade but continue the upside exposure is to roll the trade higher.
ACTION – Sell to close the AXP (89.20) Oct 87.5 call at 2.60 (for a 1.20 profit)
Roll: Buy to open the AXP (89.20) Oct 90/95 call spread for 1.05
- Buy 1 Oct 90 call for 1.23
- Sell 1 Oct 95 call at .18
Breakeven on Oct expiration – Profits of up to 3.95 above 91.05, losses up to 1.05 below.
Rationale – This books .15 in profits and now has the Oct 90/95 call spread on for a credit. It’s risking the other 1.05 in current profits but with earnings in mid-October and vol still fairly low it shouldn’t decay much and as long as the stock is here or higher will be in good shape. If the stock continues higher it can be re-assessed before earnings. If the stock fails here and starts to go lower it can be taken off for the majority of the remaining profits from the original trade. This roll takes off much of the delta risk from the original call and allows for more upside while booking some of the profits of the original call.