Options: Exploiting AmEx's Ex-Dividend

By Jud Pyle, CFA, chief investment strategist for the Options News Network

Shares of America Express(AXP Quote) have rallied more than 132% since reaching a 52-week low of $10.33 on March 5 and have hovered around $25 for a couple of months. The stock has enjoyed bullish tailwinds ever since the company announced positive earnings after the market closed on April 23. Today, we saw large call volume in the July options, but it's important to remember that this volume is likely related to the fact that the stock trades ex-dividend tomorrow.

The AmEx July 12.5 calls traded more than 238,000 times and the July 15 calls more than 205,000 times today with the stock up 22 cents to $23.98 on the day. The July 12.5 calls are home to open interest of 11,500 contracts,and the July 15 calls are home to open interest of 9,500 contracts.

You might be asking, "Was this a bullish investor buying calls that are way in-the-money instead of buying stock, or was it a bearish investor selling calls rather than shares?"

The answer is neither. This trade is neither bullish nor bearish. Instead, it was a trade designed to take advantage of the fact that shares of AmEx will trade ex-dividend tomorrow. Because the shares will trade ex-dividend, the July 12.5 calls and July 15 calls are technically an exercise because holders of call options do not participate in the dividend. So rather than hold the calls, the owner of the calls should exercise them to get the shares, therefore collecting the dividend.

So why all of the volume in the calls? Well, the answer is because if the calls are an exercise, then that means if someone is short the calls and long the stock, they can make a profit on any call that is not exercised. Think of it this way: Any option market-maker that is short the AmEx July 15 calls is long the stock against the calls as a hedge.