2018 has been a whipsaw year for equities. We had a market-wide correction that started in early February that was based on fundamentals. Investors panicked over rising rates.
But since then, it has been a slew of headlines about global tariff wars that President Donald Trump is waging against the world to negotiate better trade deals for the U.S. So stocks have been trading inside a wide range. Nevertheless we did reach or at least approach new all-time highs in some of the indices.
The financial sector of late had been out of favor. Consensus was that bank stocks cant rally! However for the last few days, some of them have caught a nice bid.
The upside of falling bank stocks is that it created a strong value in almost all major financial institutions. And therein lies the opportunity.
Yes, there is definitely upside potential in them. But I prefer to profit from the value that lies below.
Credit card transactors like American Express Company (NYSE:AXP) Visa (NYSE:V) and MasterCard (NYSE:MA) often trade along with bank stocks on the way up. The line between the two sectors is getting blurred as most transactions are now electronic.
This is more true for AXP stock than the others. AXP stock came into earnings up 4% year-to-date, whereas Visa and Mastercard we’re up 21% and 35% respectively. Square (NYSE:SQ) was up an outstanding 83% for the same period.
Last night, American Express reported earnings and investors did not like what they saw. The stock is down 2% on the headline. Although the report was not bad, they did miss on revenue and they had higher lost provisions than forecast.
Fundamentally AXP is cheap with a 13 forward price-to-earnings ratio. So owning it at a discount from current levels is not likely to be a major financial debacle. With the loss of the Costco deal in the rear view mirror, management can continue to execute on plans going forward. In short, there is no obvious reason to worry over it through 2018.
Technically, American Express stock had a setup for a breakout opportunity. But the negative reaction this morning started a small breakdown to retest the $97 per share level area.
Click to Enlarge The important thing is that they hold above the recent low of $95.50 or else risk extending the dip towards $93 per share. This is not a forecast, but it is a scenario of which I need to be aware.
In the long run, I believe that AXP will grow with the stock market. But these are uncertain times, and we still have several looming global threats to stock prices, so I have more faith in proven support levels then upside potential.
Today I share a trade setup that uses options to create income without any out-of-pocket expense. Options allow me to create a buffer between current price and the level of my risk. This way I don’t have to worry about every red tick between now and expiration.
My worst-case scenario is that if price falls through my strike then I own shares of a quality Bank at a 20% discount from current levels.
AXP Stock Trade Ideas
The Trade: Sell the AXP Jan 2019 $85 put for $1.50. Here I have a 85% theoretical chance of success. Otherwise and if price falls below it then I would suffer losses below $83.50.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the AXP Jan 2019 $85/$82.50 bull put spread where I have the same odds of winning. Then the spread would yield 14% on risk.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
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