A strategy idea for options trading investors.

TRADE COMMENTARY:

With the news that Visa (NYSE: V) will be able to charge a favorable fee structure, all uncertainty around the stock has been removed. The markets reacted euphorically, pushing the stock up more than 10%. There is no news that will likely be able to overcome this bullish sentiment in the near future. Therefore, we want to be sellers of this put spread. We would be buyers of the stock in the $77.5 — $82.5 range, so this allows us to collect some premium while waiting for the chance to buy the stock at a price we like. You never know what will happen in the stock market though, so this position keeps our risk fixed and manageable while allowing us to profit from both a neutral and bullish move.

Visa (NYSE: V)

DATE: July 1, 2011

STOCK/INDEX: V

STOCK PRICE: $84.25

OPTION PLAY: Bull Put Spread

SELL/STRIKE/MONTH/PRICE: July2 [Weekly] 82.5 Put @ $0.90

BUY/STRIKE/MONTH/PRICE:  July2 [Weekly] 77.5 Put @ $0.20

NET COST: 0.90 – 0.20 = $0.70 [Credit]

Premium Received – Premium Paid = Net Credit Received

BREAKEVEN: 82.5 – (0.90 – 0.20) = $81.80

Short Strike – (Premium Received – Premium Paid) = Breakeven

MAX PROFIT: 0.90 – 0.20 = $0.70

Premium Received – Premium Paid = Max Profit

MAX LOSS: (82.5 – 77.5) – (0.90 – 0.20) = $4.30

(Difference Between Strikes) – (Net Credit Received) = $4.30

Stutland Equities is a premier futures and options trading company on the Chicago Board Options Exchange. Founded in 2005 and headquartered in Chicago, Stutland Equities specializes in volatility arbitrage across multiple asset classes.