Investors have kept the share prices of American Express Company (AXP) range bound ahead of its fiscal second quarter earnings announcement. With a growing number of call options in the open interest, it appears that options traders are positioned to anticipate a positive move. The unusual option trading may create a strong upward trend in the price action if AXP delivers a positive earnings surprise. 

A growing number of call options remain in the open interest for AXP, with unusually high option premiums. The trading volumes suggest that, in anticipation of a positive earnings report, traders have been selling put options and buying calls. If AXP's earnings report does not meet market expectations, these bets could swiftly unwind, resulting in downward pressure on the share price of AXP.

It is difficult to accurately predict the direction a stock will move after earnings. However, a comparison of the price action between stock prices and option trading activity shows that, if the company delivers a positive report, AXP shares could rise significantly, moving closer to its 20-day moving average in the first few days after the announcement. This could happen because options are priced for a small move, but better-than-expected good news could catch traders by surprise and create a rapid rise in price.

Key Takeaways

  • Traders and investors have kept the price of shares bound in a middle range headed into the announcement.
  • The price recently has been trading above its 20-day moving average.
  • Put and call pricing is predicting a stronger upwards move.
  • The volatility-based support and resistance levels allow for a stronger move downward.
  • This setup creates an opportunity for traders to profit from an unexpected result.

Option trading represents the activities of speculators who want to profit from correctly forecasting unexpected moves in an underlying stock or index, or investors who want to protect their positions. That means option trading is literally a bet on market probabilities. By comparing the details of both stock and option price behavior, chart watchers can gain valuable insight, although it helps to understand the context in which this price behavior took place. The chart below depicts the price action for the American Express share price as of Wednesday. This created the setup leading into the earnings report.

Earnings setup for American Express Company (AXP)

Current Trends

Over the past month, the trend of the stock has seen the share price remain in the middle bound of the range, at or above the 20-day moving average. It's notable that, in July, share prices pushed above the 20-day moving average, only to pull back below it in the days before the announcement. As indicated on this chart, the price has stayed consistently at or above the moving average.

The studies are formed with 20-day Keltner Channel indicators. These depict price levels that represent a multiple of the Average True Range (ATR) for the stock. This array helps to highlight the way the price has remained close to the upper bounds middle of the range. This is an optimistic price move for AXP shares.

Tip

The Average True Range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of trading on a daily chart.

In this context where the price trend for AXP has been holding in the upper region of the middle range, chart watchers can recognize that traders and investors are expressing optimism going into earnings. In the week before earnings, the share price rose, only to temporarily fall below the 20-day moving average the next week, before reclaiming the territory above it. That makes it important for chart watchers to determine whether the move is reflecting investors' expectations for an unfavorable earnings report or not.

Option trading details can provide additional information to help chart watchers form an opinion about investor expectations. Recently, option traders are favoring calls over puts by a decent margin, as the open interest on options has started to skew toward calls rather than puts. This normally suggests that investors are expecting good news from the company report, and traders appear to be expecting that AXP will move upwards after earnings.

Tip

The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.

Trading Activity

Option traders recognize that AXP shares are just above average and have priced their options as a bet that the stock will close within one of the two boxes depicted in the chart between today and July 23, the Friday after the earnings report is released. The green-framed box represents the pricing that the call option sellers are offering. It implies a 35% chance that AXP shares will close inside this range by the end of the week if prices go higher. The red box represents the pricing for put options, with a 34% probability if prices go lower on the announcement.

It is important to note that the open interest featured nearly 85,000 call options active compared to roughly 100,000 put options, demonstrating slim bias that option buyers had, as there is a small majority of put options over calls. This unusual amount normally implies that option traders expect a move downwards. However, because the call box and the put box are relatively equal in size, it tells us that the high percentage of put options traded has not skewed expectations that much lower. This circumstance implies a far more complacent outlook.

Option pricing for American Express Company (AXP)

The purple lines on the chart are generated by a 10-day Keltner Channel study set at four times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months.

The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such a close range with equal space to run either direction. This suggests that option buyers don't have a strong conviction about how the company will report, even though puts are being purchased over calls. Although investors and option traders do not expect it, a surprising report would push prices dramatically higher or lower.

Volatility pattern for American Express (AXP)

These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that any news, surprisingly bad or good, will catch investors by surprise and could generate an unusually large move. After the previous earnings announcement, AXP shares rose 1.9% the day of earnings and continued to rise the following week. Investors might be expecting the same kind of move in price after this announcement. With lots of room in the volatility range, share prices could rise or fall more than expected.

Market Impact

AXP shares typically make substantial moves after earnings, so the result might move index prices directly. However, no matter what the report says, it will likely have a significant impact on stocks in the financial  sector. A positive report could lift other stocks in the sector such as Mastercard Incorporated (MA), Visa Inc. (V), or PayPal Holdings, Inc. (PYPL). It would also affect exchange-traded funds (ETFs) such as State Street's Financial Sector Index ETF (XLF) and potentially State Street's S&P 500 Index ETF Trust (SPY).