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Friday, March 20, 2009

Visa Stock Option Trading Strategy for April

I have been quite bullish on Visa for a while, but it has not paid off lately. In tonight's blog I would like to introduce you to an option strategy I have been using lately. It is speculating with options, which costs less, but limits the upside. Today I was buying the Visa 62.50 April call options, and selling the Visa 65 April call options. Lets assume I used this strategy with 10 option contracts. Today the April 62.50 was trading at 25¢ or $25 per option contract, and the April 65 was trading at 10¢ or $10 per option contract. I trade with TradeKing (11.45 for 10 option contracts) so my cost to buy 10 contracts for the 62.50 was $261.45 ($25 X 10 contracts, and $11.45 for commissions), and my revenue from selling the 10 contracts for the 65 was $88.55 ($10 X 10 contracts, and 11.45 for commissions). So overall my cost for this is $172.90 (rights to 1000 shares).

Now best case scenario is if Visa gets past 65 by that third Friday in April, if this is the case I would net $2327.10 on a risk of $172.90 or 1300%+. In order to make money on this bet Visa would need to get to $62.68 and you would be up $7.10. Anything after is gravy until $65. The bad news about this, is that you cap the upside. Say Visa goes all the way to 70 then you would miss out on a potential $5000 from limiting the upside by selling the 65 call. Of course I waited until today when Visa was trading at a discount of 7%. The other part is that if Visa doesn't make it to at least $62.68 by option expiration, you lose 100% of your bet ($172.90). This is a very cheap way to speculate and even though the odds are that it won't pay off, when it does it pays off in major ways!

My reason for speculating with Visa stock options: Visa has bounced off of its 50 day moving average quite nicely in the past. Today looked like it was setting up to hit its 50 day MA once again, so if it does not break below that, we could see a nice rally in Visa stock up to resistance at around 58. The chart can be seen below. The green line is the 10 day moving average, blue line is 50 day moving average, and turquoise line is the 200 day moving average. If it bounces of of the 50 day moving average and can rally above its 6 month resistance which is around 58, it has the potential of easily getting to the 63-64 range where the 200 day moving average line intersects the axis. After last quarter and a very strong earnings report, it should be able to get through its 6 month resistance with help from the market.



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2 comments:

Tony Chai said...

Hi :

Thanks for dropping by my blog.

As with your Visa trade, do be careful when you approached it's earnings announcement date coz the price and options premium volatility could be quite great.

But I've checked that Visa's earning date would be way ahead from the April's option expiration date.

When you execute an option trading debit spread, time would be at your disadvantage unless the stock price moves favourably to your position in a short time.

Since you're trading such a short term front month option, it would be better to trade near the money options since you'll be selling a strike away to minimise the cost of your buy leg. The other advantage would be you could hit-and-run with your profit quickly once the price move favourably towards your direction.

With far OTM options, you really need to pray and hope the stock price would move substantially in your favour in a short time.

Regards,

Tony Chai

Option Maestro said...

Understood, but the chart is telling me it could get there. With overall volatility as high as it is I think playing these far out options for so cheap could hit. Thank you for your input!

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