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

Shares of

America Express

(AXP) - Get Report

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?"

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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.

Say that the calls are worth parity right now -- that is $2.45 with the stock at $23.98. If the calls the option market-maker is short are not exercised, then the stock will fall by the dividend amount. So the stock, in this case, falls by 18 cents, the amount of the dividend, dropping to $23.80.

The call that the market-maker is short also falls by the amount of the dividend to $2.27. Since the market-maker is long the stock (a loser in the fall) and short the call (a winner in the decline) it seems that the market maker has no economic gain, but the market-maker gets to pocket the dividend of 18 cents.

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That is all there is to this trade: market-makers trying to get short the calls so that they can be a part of the open interest in each of those strikes. So the volume that we see is market-makers buying and selling the calls with one another. All of the trades go on the books as opening. The market-makers are smart enough to exercise their calls and only ones left are anyone who does not exercise.

Investors should be aware of activity like this so that they do not get fooled into thinking the options activity will give them some clues about the stock activity. When looking at options activity, particularly deep-in-the-money call (DITM) options, investors should be attune to this and other arbitrage activity to make sure they have a clear picture of the types of risks people are taking in their stocks.

Meet Jud Pyle live in Las Vegas at the Forex & Options Expo.

Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for

Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."