Wednesday, October 19, 2016

AXP Analysis

Update 11/15/2016: AXP shot up sharply after earnings were published showing it had beat the Street's earnings estimate. I exited for a loss as expiration approached.

Shares rose by 17.2% over 27 days, or a +233% annual rate. The options position produced a 73.2% loss on debit for a -990% annual rate.

The financial services company American Express Co. (AXP), headquartered in New York City, publishes earnings on Wednesday after the closing bell.
[AXP in Wikipedia]


I shall use the NOV series of options, which trades for the last time 30 days hence, on Nov. 18.


Implied volatility stands at 61%, which is double the VIX, a measure of volatility of the S&P 500 index. AXP’s volatility stands in the 50th percentile of its annual range. The price used for analysis was $60.77.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; central tendency earns move

The Trade

AXP has been on the decline since Nov. 25. Elliott wave analysis shows that it is in the midst of a 3rd or possibly C wave to the downside depending upon whether it is an impulse wave or a corrective.

Warren Buffet’s Ground Rules
by Jeremy C. Miller

The price remains within the most recent range on the 180-day chart and to my eye looks like a sideways correction.

Zacks Investment Research gives AXP a neutral rank with evidence that analysts are adjusting their opinions in anticipation of a negative earnings surprise. However, the earnings surprise prediction methodology, according to Zacks, isn't reliable, and I don't use it in making my decisions.

Brokerages in aggregate give AXP a negative 74% enthusiasm index, with only 13% of 23 analysts issuing strong buy recommendations.

AXP has risen only once immediately after the last four earnings announcements.

Given the neutral nature of the larger Elliott wave formation,  the bearish near term trend, the negative judgement by brokers and the negative history of post-earnings price rises, I am leaning toward a bearish play, although I shall also consider a direction neutral strategy.

I attempted an iron condor but the risk/reward ratio was too high on the risk side. So I moved on to the directional trade.
Bear call spread, short the $62.50 calls and long the $65 calls,
sold for a credit and expiring 
Nov. 19.
Probability of expiring out-of-the-money


The premium is $0.67, which is 27% of the width of the position’s wings.

The risk/reward ratio is 2.7:1.

The zone of profit in the proposed trade covers $1.60 above the price at entry. The biggest immediate move after each of the past four earnings announcements was $7.58, and the average was $3.31. After eliminating the maximum and minimum post-earnings movements, the central tendency is $2.53.

Decision for My Account

I've opened a position AXP as described above. The stock at the time of entry was priced at $60.90.

-- Tim Bovee, Portland, Oregon, Oct. 19, 2016


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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