Jerome Powell played Santa today for all the good little boys and girls on Wall Street. Gifts were had all around as the Fed Chair declared the current level of interest rates is near neutral. One of the contributors to recent market jitters were fears that JP and crew would ram rates higher than necessary next year and thus damage our aging economic expansion.
With everyone jumping back into the pool the Nasdaq-100 soared 3.2% amid heavy buying. While the technicals for most Indexes remain a mess, the accumulation day does strike a more bullish tone. In scanning Wednesday’s winners, I stumbled across none other than American Express (AXP) which is making a new record high as I type.
Think about the implications for a moment.
Stocks at record highs in this environment are rarer than a one-eyed unicorn. Sure, many have clawed their way partially out of the holes so deeply dug last month. But not many have been able to rocket to new heights.
AXP – you are a rockstar.
It’s not just exhibiting relative strength versus the broader market; it’s beating fellow credit card companies like Visa (V) and Mastercard (MA) too. I count that as doubly bullish.
Now, for all I know AXP is one banana peel from death so let’s treat today’s case study as just that – a CASE STUDY. I want to illustrate the powerful bull call spread strategy. I’ve reviewed this vertical spread strategy previously (see here) so read it if you need a primer.
I’m going to build a cheaper, more aggressive bull call that has the potential to double our dough if AXP can continue lifting to $120 by January expiration.
Let’s buy the Jan $115 call while selling the Jan $120 call. The position can be purchased for a net debit of $1.67. The price tag is cheap for two reasons. First, we are using OTM options. And, second, we structured a $5-wide spread instead of a $10-wide spread. The beauty of the low price tag is that we won’t need to use a stop loss and can thus avoid getting whipped out.
The maximum reward is limited to $3.33 and represents a potential 199% return. Of course, that’s if you ride it to the bitter end and AXP ends up above $120 at expiration. I suggest exiting early if the stock touches $120 at any point throughout the trade. This technique will increase your probability of profit.
Using a risk graph we can model the potential gain if we bail at $120. If we tag that higher strike, then the reward should be $153 which is still a mouthwatering return nearing 100%. Admittedly, a move to $120 would be substantial so it will take time. But we do have a good seven weeks, and the real Santa is still coming to town, so maybe, just maybe, AXP can go the distance.
Financial freedom is a journey
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