Option Trade for a Range Bound Stock (AXP)

Credit card companies have been nonexistent for the summer. American Express AXP and Visa V have been trading in a range since May. Mastercard MA has seen a little bit of action thanks to some better-than-expected earnings.

The stock we want to focus on is American Express. AXP has traded in a range from $72.00 to $78.00 and right now we are bouncing off the lower levels. AXP is oversold so a bounce is probable here especially if we get a market bounce to go along with it. We could get long here with a first target at $73.30 and another target at $75.00.

What if we don't get a bounce?

There is another characteristic of AXP that we want to take advantage of, and that is an above-average volatility.

Right now implied volatility 30 days out is sitting at 22.06 while its yearly average volatility only comes in at 19.50. Not a big gap between current and average but as you notice volatility is still elevated. In fact, for the last earnings volatility only rose to 23.00.

More importantly volatility is high compared to how AXP is moving. Right now AXP is doing nothing but spinning its wheels.

Where is the play in all this volatility mumbo-jumbo?

We need a play that is going to profit from a drop in volatility and take advantage of a stock that isn't moving.

This sounds like an Iron Condor!

Iron Condors are generally neutral plays. We say "generally" because you will actually be short some delta thanks to volatility skew. The Iron Condor we are looking at is the October 62.5/65/80/77.5.

That means we want to sell the 65 puts, buy the 62.5 puts, sell the 77.5 calls, and buy the 80 calls, and we want to do this for a .52 credit.

We want to take advantage of maximum time decay so we want to place this trade now and take it off in 30 days. This will allow us to profit quickly while AXP sits in a range of $64.50 to $78.00. When implied volatility comes in, it will reduce the premiums in the options which will generate our profit.

The margin on this trade will be 1.98 so we generate a 26% return on margin with an 80% chance of success.

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