Even though the holidays are over and many people are considering cutting back on spending in the new year, there are plenty of things that people simply have to buy. This trade idea on Visa (V) can benefit from that idea, as well as from overpriced options.
Visa (V — $221.13): Put Credit Spread
The trade: Sell Visa stock’s Jan 24 210/215 put credit spread (selling the Jan 24 215 put and buying the Jan 24 210 put) for 50 cents or better.
The strategy: The maximum potential profit for this trade is 50 cents if Visa stock is trading above $215 at Jan. 24 expiration. The maximum loss is $4.50 ($5 – $0.50) if V is trading below $210 at expiration. Breakeven is $174.50 based on a credit of 50 cents.
The rationale: Since the company was added to the Dow Jones Industrial Average in September, Visa stock has moved higher by about 18%. Analysts generally regard the company in a positive light even though its current P/E of close to 30 is considered slightly high. Although MasterCard (MA) has made some strides, Visa still dominates purchase volume. Visa had a 10% rise in service revenue and an increase of 12% for international transaction volume from 2012. Last year, Visa processed just short of $1 trillion in transactions and MasterCard finished second with $534 billion.
Click to Enlarge If you take a look at the chart of Visa stock, V has been hanging around just above the $220 area. That is a key element to whether this trade can profit. The $220 area is now considered potential support for V shares, and ever since they moved above that area, they’ve barely closed below it.
This trade idea involves selling premium as part of a spread, and currently the 30-day implied volatility is above historical levels, possibly making options a bit overpriced. This is advantageous for a seller of premium.
Visa is expected to announce earnings Jan. 30, which is just after expiration for this trade.
Go ahead and use your Visa this weekend. This trade idea might be able to help offset some of the transaction.
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.