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American Express Company (NYSE:AXP) captured the attention of options players on Friday, as total option volume reached roughly 19,000 contracts, or more than two times what is typically seen. Orders were fairly evenly divided between calls and puts -- call volume ran 75% hotter than what's expected, while put volume was close to three times heavier than usual.
Together accounting for about two-thirds of this volume were two block trades at out-of-the-money LEAPS: the January 2015 85-strike call and 65-strike put. The calls changed hands near the ask price at $3.83 per contract, and the puts crossed below the bid price at $5.08 each. In short, it appears a bullish AXP speculator initiated a long-term synthetic long (split-strike) stock play for a net credit of $1.25 per pair of contracts. Open interest swelled over the weekend at each strike, confirming our theory of buy- and sell-to-open activity.
This strategy "synthesizes" the return of a traditional long stock play through the use of long calls and short puts. Due to this trade's split-strike component, gains are static between the two strike prices ($65 and $85). If AXP is trading in this range at expiration in January 2015, profit is limited to the net credit collected.
Above the 85 strike, potential gains are theoretically unlimited. South of the breakeven price of $63.75 (the put strike less the net credit collected), losses are unlimited down to zero. From the stock's current price of $73.65, breakeven is 13.4% away, while the call strike is 15.4% to the upside.
According to Trade-Alert, Friday's volume duplicated similar activity seen at these strikes last Wednesday, when blocks of 4,150 options were traded as part of the same bullish strategy. American Express Company (NYSE:AXP) has appreciated roughly 28% in 2013, but has been shuffling sideways around the $75 area over the last three months. In mid-July, the stock topped out at a record high of $78.63.