Visa Inc. V moved slightly lower last week despite a positive earnings surprise and an encouraging guidance for the current fiscal year. Following this earnings report, RBC reiterated its “outperform” rating on Visa stock but lowered its 12-month price target to $100 from $113. This new target still allows for almost 30% of upside from current levels.
Was this a case of “sell the news,” or do investors and analysts have reason for concern when it comes to the shares? Visa shares have lost 10.5% year-to-date, underperforming the broader market and peers such as MasterCard MA, down 3.8% and American Express AXP, up 4.3%.
On the flip side, some retail analysts expect holiday spending to increase this year. Market research firm ComScore is targeting a 7-9% increase in e-commerce spending this holiday season, and the National Retail Federation thinks holiday sales figures may rise 2.3% for traditional brick-and-mortar retailers. Increased shopping can mean increased business for credit card companies, and this can often enhance revenue.
So Visa is an interesting stock to watch as there are definite arguments supporting both the bullish and bearish camps. We've outlined a pair of option strategies below – one bullish, one bearish. These strategies are for educational purposes only; be mindful of your own goals, risk tolerance, and experience before considering any new trades. All prices are as of Tuesday afternoon close, when V shares were at $78.57, up $1.25 cents on the day.
Bullish Option Strategy: Bull Call Spread
Think holiday shoppers will spend more this year, helping out Visa and its peers? Consider looking at a moderately conservative bullish strategy like a bull call spread. The January 80/90 call spread can be purchased for a net debit of $2.45 (buying the 80 call, selling the 90 call).
Profit is maximized at expiration if Visa is trading above $90 by the time these options expire on January 21. The maximum gain the spread buyer can realize is $7.55 (the difference in call strikes less the premium paid), a return on risk of 308%.
The most the spread buyer can lose is the premium paid, should Visa be trading below the 80 strike when the options expire. Breakeven on this position is $82.45, or the long strike plus the premium.
To visualize the potential profit and loss of this and all trading strategies, I recommend analyzing your spreads using a profit/loss calculator. The OptionsHouse platform has this tool available as part of a virtual options trading account.
Bearish Option Strategy: Put Butterfly
Those of you with a Scrooge-like take on the holiday shopping season might consider a broken wing put butterfly. The December 62.50-72.50-80 put butterfly can be purchased for a net debit of $2.00 (buying one 62.50 put, selling two 72.50 puts, buying one 80 put).
If Visa is trading right at the short strike ($72.50) when the options expire, profit is capped at $5.50, or the difference between the higher-strike long put and the short put ($7.50) less the debit paid. Because this is a “broken-wing” butterfly (the spreads aren't evenly spaced), the maximum losses are different if the stock rallies or declines.
To the upside (above the 80 strike), the maximum loss is limited to the premium paid, or $2.00. To the downside, it is $4.50, which is the difference between the lower-strike long put and the short put (10) less the maximum profit. Maximum loss occurs if Visa is trading below $62.50 when the options expire.
To the downside, breakeven is $67, or the short put strike less the maximum potential profit. To the upside, breakeven is $78, or the higher-strike long put less the premium paid. If Visa is anywhere between these levels at December expiration, the spread will be profitable. One undesirable consequence of the broken-wing butterfly is that margin requirement is greater than that of a traditional butterfly.
Photo Credit: DeclanTM
The above information is provided by OptionsHouse, LLC (“OptionsHouse”) for informational and educational purposes only and is not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Commentary and opinions expressed are those of the author/speaker and not necessarily of OptionsHouse. Neither OptionsHouse nor any of its employees, officers, shareholders or affiliated companies guarantee the accuracy of or endorse the views or opinions of guest speakers or commentators. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees.
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