Trade Ideas January 13, 2020

Update: AXP Rolling Jan Call Up and Out

by Dan

On December 12th I laid out a near term bullish case for shares of American Express (AXP) into the new year:

recent market sentiment is clearly in the camp that there will be a phase 1 trade deal announced soon, possibly rolling back existing tariff rates and pushing out expected consumer tariffs on Dec 15th. I am not sure how much is baked into the market at current levels, but if that were the case if could easily be a sort stabilizing force in the very near term

Short-dated options prices are off of 2019 lows, with 30-day at the money implied volatility at just 16%, implying about 1% daily moves, suggesting a cheap way for traders to express defined risk near-term directional views

At the time it was my view that expressing that bullish view with Jan near the money calls offered the most optionality, here was the trade idea from Dec 12 when the stock was $122.75:

BULLISH TRADE IDEA: AXP ($122.75) BUY JAN 125 CALL FOR $1.60
Break-even on Jan expiration:

Profits above $126,60, up 3.3%

Loses of up to 1.60 between 125 and 126.60 with max loss of 1.60 or 1.3% below 125.

Rationale: this trade idea offers the optionality to spread by selling a higher strike call in Jan expiration on a move above the 125 strikes, risks 1.3% of the stock price for the next month or so, which will include earnings and breaks even up only 3.3%

I also detailed the trade idea on CNBC’s Options Action on Dec 13th:

Now with just 4 trading days to expiration and the stock trading at $128.,50, up nearly 5% it makes sense to consider ways to manage this trade idea. The stock is quickly approaching its prior all-time high from the summer just below $130, which may serve as technical resistance prior to its Jan 24 earnings announcement:

 

With the stock at $128.75, the Jan 125 call that cost $1.60 when the stock was $122.75 on Dec 12th is now worth $3.80, or a $2.20 profit.

Here are the options the way I see it for trade management.

  1. Keep a close eye on it prior to this week’s expiration, and pull the trigger on selling to close and book the profit.
  2. Sell the Jan 130 call at 45 cents and lock in some of the gains and own the Jan 125 – 130 call spread for $1.20, with a max gain of 3.85 on Friday’s close if the stock is 130 or higher.
  3. Roll up and out to catch earnings, this would entail selling to close the Jan 125 call and buying to open a higher strike call in Jan 24th weekly that will catch their Q4 earnings which might be the catalyst to break the stock out.

 

I am in the 1 or 3 camp… no one ever went broke taking a profit, a wise man once said… but the third option also is playing with the house’s money, and if the market continues to ramp, and AXP posts a beat and raise, then a breakout could be in the cards…

Action: Sell to close 1 AXP ($128.75) Jan 125 call at $3.80 for a $2.20 profit
Action: Buy to open 1 AXP ($128.75) Jan 24th weekly 130 call for $1.40 (booking 80 cents in profit, but keeping profit potential for one more week above the new break-even at $131.40)

 

 

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