Thursday, April 23, 2009

The Play of the Day

I am not really a daytrader in the sense of getting in and out of stocks or options within a span of a day to do scalping and such. But sometimes a stock will present an incredible opportunity to make a trade intended for no more than a day.

Today, I see that opportunity with AXP (American Express). They report earnings after the bell and are sitting near the upper Bollinger Band line at $20. But that is not what is so enticing.

Look at the analyst estimates for AXP. There are 19 analysts with an average estimate of .12/shr profit. But look at the low and high estimates. The low estimate is a .19 loss and the high estimate is a .34 profit. That is a HUGE relative span. You are talking about 200% in either direction.

That tells me that perhaps someone knows something that other analysts don't. It would be great to see the entire list of estimates so a more relative computational method can be used to determine how wide the differences are using standard deviations and such. But a 200% swing in either direction?

That could present an opportunity. I can't say for certain if AXP will miss big or hit big. But this could be a great straddle play if the price is right. With the estimates having a deviation of 200% in both directions, it would seem a straddle is a good play but it could be a suckers bet. The May 20 calls and puts are both right around $2. A 10% premium. This means for a straddle to pay out, you really need at least a 15% move in AXP to really make any money on the straddle.

A butterfly spread would be the another option if you think the deviations in the estimates is a red herring. It is a safer play but why make such a safe play on a volcano which can explode at anytime? And you will lose if it hits or misses big.

I want to bet on volatility here and a straddle is a good way. But an ATM straddle seems pricey to me at a 10% premium. So a Strangle has to be considered which would be OTM calls and puts. I will put less money into the bet but have more potential for higher gain. I also have more potential to lose all of the money I put in if the stock does not move.

But, I want to lean on the side that AXP will miss earnings and guidance will be bad. The current price of the stock has it meeting earnings. I have to believe that will be very hard to do. So, I don't want to get carried away and just buy puts. I know, if anything, AXP is not going to skyrocket. So I feel safe selling May 20 calls. At the same time, I will buy a bit of the May 21 calls as protection. And then I will also buy May 19 puts. So my bet is for it to go lower but just in case it goes higher, I have some protection. And if it happens to remain the same, I limited my losses by selling the May 20's.

The breakdown of how much I would invest in this relatively would be $1000 for the May 19 puts, $2000 selling the may 20 calls and $1000 on May 21 calls so my initial investment is $0. I only make money on a large move down. I can only lose money on a large move up. I like my odds.


  1. Well, you probably don't want to follow my Gold play but here is how I see it. Gold, to me is a good long term play. I think everyone should own some physical Gold just in case, plus you can buy physical gold from a legit gold company like Kimco and sell it on ebay for a profit right away if needed. Don't ask me why, but ebay buyers pay above premium for gold coins.

    For short term, I think GLL is a better play than GLD only because we are likely going into a deflationary period for many months before we see any signs of inflation. Inflation will come. It has to, but not in the next 6 months. The question is, will it be hyper-inflation or 1980's-ish inflation.

    So short term, GLL is the play but you should own some physical gold. Then longer term, GLD will be the play.

    Playing GLL and GLD, you have to take profits anytime it moves 5% or more. You can't expect bigger swings than that.

  2. gold's at the iron wall of 900

    750 - target


  3. GLD is definitely the wrong play in this market. DJI will trade up to 9500 by mid June. The Fed will continue to print paper until the financial markets stablize. BULL MARKET here we COME!