2 Option Trades for American Express (AXP)

Stocks trade in two cycles: they are either trending or range bound, and surprisingly, most stocks spend their time in ranges.

Ranges are formed when a stock is bouncing around between support and resistance. Ranges offer great and continuous opportunities to make money. Unlike a trending stock where you have to wait for a stock to set up, if it ever does, before trading it, a range will give you countless setups.

At Bullogic, we call this "Trading in the Box" and "Trading out of the Box". Trading in the Box is when you will sell short the stock as it pushes into resistance and go long the stock as it comes down into support. Trading in the Box gives you excellent risk/reward setups since your target is clearly laid out and your stop-loss will be close to your entry.

Trading out of the Box is playing the stock long when it breaks that resistance or going short when it breaks down through support. Again, these are great risk/reward setups since you will have a close and defined stop-loss for every play.

American Express AXP is in a box, in fact it is in two boxes.

The green lines on the chart mark our inner box. Clearly AXP has become range bound between $73.30 and $76.30. This range may seem small but at 4% it gives you plenty of space to buy and sell and make money.

The white lines mark the outer range which spans from $71.70 to $78.60, a 9% range.

There are several ways we can play this move. First, if you are like us we believe AXP is going to break outside of its inner range and move higher to $78.60. Volatility is at the lows on AXP because it reported earnings July 17th. We feel this is a good time for a call spread. More specifically the August options expiring on the 16th with the 75/80 call spread. That means we are going to buy the 75 strike calls and sell the 80 calls for a total cost of $137 per lot.

This is how the trade is going to look:

This means we are going to risk $137 to make $363 which matches up with our ideal risk/reward. We like buying the 75 strike because that is our ATM strike, and we are selling the 80 because that is our target. We want this trade to work in the next couple of days so we are not eating away at time decay.

Another way to trade this breakout is with a call butterfly. Still targeting the August options expiring on the 15th we want to put on the 75/77.5/80 butterfly. That means we are buying the 75 strike, selling 2 at the 77.5 strike, and buying the 80 strike.

Butterfly are good to use if you feel the stock is going to creep higher. In AXP's case this is a good possibility. With the butterfly our max profit will be at our target, so if we are correct in our analysis we stand to make good money. The total cost on this trade is going to be $86 per 1 lot which a max reward of $160. Again, this falls into our ideal reward/risk ratio.