Investors are Shorting Deep Out-of-the-Money Puts and Calls in American Express

Investors are taking advantage of the financial crisis and shorting out-of-the-money (OTM) puts and calls of high-quality financial stocks like American Express Company (AXP) to create extra income. The stock is down slightly today, Monday, March 13, to $161.84, after the Fed announced measures to shore up depositors. 

These developments have elevated option premiums and made them attractive to options investors to short.

For example, the March 31, 2023, expiration puts options at the $125 strike price trade for $1.01 at the midpoint. That strike price is now over 22.7% below today's price. This means that the investor who puts up $12,500 in cash and/or margin will receive $101 immediately in the account. That equates to a yield of 0.808% or 9.7% on an annualized basis.

Similarly, deep out-of-the-money call options are worth shorting as well. For example, the $180 March 31 calls trade for 52 cents. This strike price is between 11% and 12% over the present stock price and this is not as great a premium as the puts. 

That means, obviously that options are skewed to the put side. But this still provides good potential income to investors who want to take advantage of the high premium prices. The investor here, on a covered call basis, would make 31 basis points. But normally these options premiums so far away from the spot price would be trading much closer to zero.

High-Quality Stock

As I explained in an earlier article, this stock has a very good dividend. American Express Company announced on March 8 that it had increased its quarterly dividend by 15% to the equivalent of an annual rate of $2.40 per share. That now gives the stock an annual dividend yield of 1.49% based on its price of $161.

Amex also said it would repurchase 120 million of its shares outstanding. This is up from the remaining 36.4 million shares available to buy back with its prior authorization. The 120 million buyback program will reduce its share count by 16.1%. However, that could take several years to complete, and we estimate the company will do this over 4 to 5 years or so.

Moreover, AMEX stock trades for less than 15x earnings. Granted, if the U.S. economy heads into a deep recession that will lower the amount of credit card spending. That could hurt Amex since it requires its credit balances to be paid off each month. But short of that the company should continue to enjoy good economics.

The bottom line is that investors have found a way to make extra money by shorting these deep out-of-the-money puts and calls on AMEX stock.

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