Dow and SP-500 component American Express (AXP) were in Tuesday's top spot for stocks within the former index registering unusual option volume. The credit card issuer saw nearly 360,000 contracts trade versus its daily average of about 18,500. News on the session focused on the Fed Reserve Board's proposal to amend credit card provisions of Regulation Z.

"Reg Z" is otherwise known as the "Truth in Lending" provision and helps protect consumers against potentially unscrupulous practices. The proposed rule looks to ban "several harmful practices and requires greater transparency in the disclosure of the terms and conditions of credit card accounts."

With the announcement in hand and shares off a slightly pressured 1.22%, option traders seemingly went against the grain and took to trading deep calls en masse. The real story behind the activity was shares of AXP going Ex-Dividend on Wednesday for $0.17.

As such, "Dividend Plays" which focus on "getting away with the dividend" in calls showing both heavy open interest and a matching put value less than the pending payment to shareholders accounted for the lion's share of the volume. With open interest of 9,600 and the put "No bid, at five cents", the October 25 call was the session's most active with nearly 108,000 contracts trading.

In second position with regards to unusually heavy option action, Walgreens (WAG) was just what the doctor or umm, pharmacist ordered for bulls. Shares gapped substantially higher and closed with strong gains of nearly 9.25% and the stock's best levels in more than one year. The catalyst behind the move was an earnings beat of $0.08 on profits of $0.47 per share. The strong results were attributed to improved sales and management's dedication to relentless cost cutting.

Options in WAG saw a strong reaction as well in the form of a post earnings volatility crush. The October contract which was stiffly bid near 36% IV for the ATMs was reduced to readings just below 25%. In this instance, while volatility bulls lost on vega, the abnormally large move in shares more than compensated those traders as the combined gamma and delta lifted the October 34 straddle from $2.18 to $3.43 per spread.

Premiums in the new ATM October 37 strike are now trading back near one month lows, priced slightly below WAG's longer-term 90-Day SV [statistical volatility] and mostly on par with range highs of the past month for the 10 and 20-Day SV readings.

Last up or in this case, in third position, pharma giant Bristol-Myers Squibb (BMY) saw a near 1000% surge in its options Tuesday on volume of about 114,000. As with Walgreen's, a pending Ex-Dividend in Wednesday's session looked to account for the bulk of the unusual volume. However, with shares at $22.88 and a quarterly payout of $0.41, its yield of 5.50% is more than four times as high and hence more desirable as it relates to capturing the dividend i.e. the dividend game.

Drug stocks of course are always prone to extra gap risk due to FDA announcements or surprise competitive encroachments on existing products which could impact earnings. However, the current low underlying volatility of roughly 13% to the lows 20s on BMY and mostly cheap share price adds up to traders anticipating much smaller movements and hence, playing for the dividend that much more competitive.

In saying that, the placement of linked and likely (swapped) buy-writes and verticals between traders was very popular all the way out into the December contract. During the trading day more than 32,000 contracts on the 16, 17, 18 and 19 "deep enough" calls changed hands with open interest ranging from about 500 to roughly 1,600. If traders playing the game manage to get away with the dividend, which in the end is up to the O.C.C. and others (in)actions, a guaranteed Rx for profits should see some traders locking in the buy-write or synthetic short put sale with the purchase of the real put and enjoying a gift-wrapped conversion into the holidays.

Chris Tyler
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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