Charge Ahead With a Visa Credit Spread

by John Kmiecik | May 30, 2013 8:34 am

Has this bullish run really ended, or is the market just taking a breather? One of the beautiful things about options is that they give traders versatile strategies for all types of market conditions. Here is a trade idea on a well-known company that gives traders a chance to profit even if the stock moves in a couple of different ways.

It’s probably safe to say that if you a typical consumer, you will probably use some type of credit/debit card over the summer. Whether it is a family vacation, concert or a dinner out, Americans love to use their cards. It is no wonder that Visa (V[1]) has done so well. Visa charges a merchant fee of 1.9%; the banks deduct the fee, pay the merchant — and then the banks pay the merchant fees to Visa. It’s a pretty simple formula for success.

The trade: With V shares trading at $178.14, sell the June 165/170 put credit spread (selling the June 170 put and buying the June 165 put) for $0.55 or better.

The maximum potential profit for this trade is $0.55 if V is trading above $170 at June expiration. The maximum loss is $4.45 ($5 – $0.55) if V is trading below $165 at June expiration. Breakeven is $169.45 at expiration based on a credit of $0.55.

Visa chart[2]

The chart of Visa shows a sideways trend for the last month. The stock has a nice support area (pivot lows) around $176 that it has not traded below since May 2. If that weren’t enough, Visa has another support area at $170 from prior resistance that should be able to keep the stock from falling farther.

Maybe you won’t need a Visa to have fun this summer, but a credit spread on Visa might be fun and profitable!

At the time of publication, Kmiecik had no positions in the securities mentioned.

  1. V:
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