The 2016 U.S. elections was a massive catalyst for the financials. Visa Inc (NYSE:V) had a 27% rally off the December lows with very few red days. But for Visa, it wasn’t just the meme trade. It actually rallied behind improving fundamentals. V stock spiked 10% on the results from February and hasn’t looked back since.
The sector has been rallying from a base of good fundamentals. Add to it that, the future’s looking rosy thanks to Trump promises. It’s hard to expect disappointment to justify bearish scenarios.
That said, shorting financials will be very difficult and fewer traders will want to do it. Therefore, the upside bets are going to be the easier trades.
Fundamentally, Visa is not cheap. Its price-earnings ratio is higher than Mastercard Inc (NYSE:MA) and even that of Paypal Holdings Inc (NASDAQ:PYPL). But we are in full swing of transitioning most of our shopping online, so more of the transactions will also come into the transactors such as Visa’s domain.
Click to Enlarge Technically, there is little I can decipher from an all-time high level other than to say that I could be late to the party. That’s why in today’s trade I won’t be chasing a rally.
Instead I will generate income from selling downside risk below levels that I deem safe. The prerequisite here is that I am willing and able to own Visa if my trade sours.
The Bet: Sell the V Sept $87.50 naked put and collect 75 cents to open. This trade has an 85% theoretical chance of success. But if the stock falls below my risk then I will have to own the shares, so I’d better be willing and able to do so. My breakeven point is $86.75 per share.
If I don’t intend on owning V stock, then I’d be better off selling a spread instead of naked puts.
The Safer Bet: Sell the V $90/$87.50 credit put spread where I have about the same chances of success. However, by selling a spread I limit my risk. The compromise is not that terrible, however, since I can still yield 15%.
In either case, I don’t need a rally in Visa stock to win. I gain maximum profits if price stay above my sold strikes. So I am building myself a 10% buffer from current price. So even with the worse-case scenario I would be lucky enough to own V shares at a deep discount to today’s price.
Investing is dangerous and since there are no guarantees, I only risk money that I can lose.
Learn how to generate income from options here. 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.
