Visa Inc (V) and MasterCard Inc (MA) are two well-managed companies that have been proven performers. Visa and MasterCard stock have performed relatively well in the past twelve months when compared to financials in general via the Financial Select Sector SPDR exchange-traded fund (XLF) or their direct competitor American Express Company (AXP).
Click to Enlarge Although Visa is the clear 12-month outperformer, Visa and MA stock are in similar technical situations at current level. The price ranges for both have recently tightened, indicating a potential resolution of size — meaning a move could be coming where the direction is yet unclear.
Given that equity markets are near all-time highs, I favor the downside move from here in V and MA over the upside potential.
For months, markets have been expecting a second rate hike from the Federal Reserve. Such a move could provide temporary lift in financial equities, including Visa and MasterCard stock. But if markets’ fears are justified and the indices fall as a result of the hike, the upside move from the financial sector should be short-lived. Financials will revert to falling with the general markets.
MA and V Stock Trades
Click to EnlargeAt current levels, I will put forward two separate but similar pair trades to short V and MA.
Trade No. 1 — Short Visa stock: Buy the Visa $75 July put. This is a bearish trade for which I pay 71 cents per contract. I stand to profit if V stock price falls towards $75 per share between now and mid July, when the option expires. But to mitigate my risk, I want to sell puts to completely offset my out-of-pocket expense.
Trade No. 2 — The bank for Visa short: Sell the Visa Jan $60 put. This is a bullish Visa trade but at a much lower price than current. For this I collect 99 cents per contract. I am willing to own Visa stock at $60 per share between now and January should it fall below that line.
Trade No. 3 — Short MA stock: Buy the MA July $ 90 put. This is a bearish trade for which I pay 64 cents per contract. I stand to profit if MA stock price falls towards my purchased put in the next 46 days.
Trade No. 4 — The bank for MA short: Sell the MA Jan $72.50 put. This is a bullish MA trade but at a much lower price than current. For this I collect $1.20 per contract.
The net effect of either of these pair trades is a net credit to me, meaning I collect more than I pay to open them. There are literally hundreds of ways I can modify these trades to have them suit my level of risk tolerance and account size.
I am not obliged to hold any of these trades into expiration. I can close any of them for partial gains or losses. After setting any trade, it is important to manage its odds of success.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
