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.