The U.S. has a big problem with people living beyond their limits and paying for things with credit — not that credit doesn’t have a useful role in society, but it’s easy to overdo it. Apparently if you look at the results of Visa’s (V) latest earnings announcement, it doesn’t appear that people are slowing down much particularly over the holidays. Here is a trade idea on Visa stock that takes positive earnings into account, but also the chart.
Visa (V — $220.88): Put Credit Spread
The trade: Sell Visa stock’s Feb 205/210 put credit spread (selling the Feb 210 put and buying the Feb 205 put) for 70 cents or better.
The strategy: The maximum potential profit for this trade is 70 cents if Visa stock is trading above $210 at February expiration. The maximum loss is $4.30 ($5 – $0.70) if V is trading below $205 at expiration. Breakeven is $209.30 based on a credit of 70 cents.
The rationale: Visa is the biggest bank card network in the world. The California-based company announced earnings Thursday morning, saying that its fourth-quarter net income rose almost 9% to $2.20 a share compared to $1.93 from a year earlier, and better than the consensus estimate of $2.16 per share. CEO Charles Scharf said Visa is looking to increase business outside of the U.S., where more than half of its revenue is generated. He also said that according to Visa’s results, the holidays were better than most reports telegraphed. Visa expects its marketing expenses to increase because of the Olympics and other international events, but the strengthening U.S. dollar against some currencies has helped reduce net operating revenue. We will have to wait and see, but you would think that all of these positives should translate to the value of Visa stock increasing.
Click to Enlarge Speaking of Visa stock, if you take a look at the chart, it has several attractive potential support areas that could keep this trade idea from losing.
When an options trader sells a put spread, he or she can reach the maximum profit on the trade if the stock stays above the short put strike. Visa stock has pivot areas (crucial areas) that have acted as support and resistance in the past. The $220 area has kept V shares from moving higher and lower in the past, and over the last several sessions, they have not been able to close below $215.
If that wasn’t enough, the 50-day simple moving average is currently right around $214. That makes three areas of potential support. What’s not to like?
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.