American Express Company (NYSE: AXP) shares are rising today in anticipation of AXP's earnings announcement this evening. Earlier this month, the company forecast a fourth-quarter profit below year-ago results, and said a flagging U.S. economy will hurt annual profit in 2008. The company also set aside $440 million in the quarter to cover expected defaults. Analysts are expecting a fourth-quarter profit of 71 cents a share on revenue of $7.85 billion. One thing to keep in mind is that AXP has missed analysts' earnings estimates in each of the last three quarters. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on AXP.After hitting a one-year high of $65.89 in July, the stock hit a one-year low of $41.15 last week. AXP opened this morning at $46.10. So far today the stock has hit a low of $45.03 and a high of $46.35. As of 10:40, AXP is trading at $46.32, up 88 cents (1.9%). The chart for AXP looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a March bull-put credit spread below the $35 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 7.5% return in just three and a half months as long as AXP is above $35 at March expiration. AmEx would have to fall by more than 21% before we would start to lose money.
AXP hasn't been below $41 at all in the past year and has shown support around $42 recently. This trade could be risky if the company's earnings tonight are not up to par or if the Fed makes a surprisingly hawkish move this week, but even if either of these things happens, this position could be buoyed by support AXP could find between $40 and $45, where the stock bottomed over the past month.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in AXP.
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