Monday, February 7, 2011

V June 85/65 bull reversal



The Trade
A trader sold 550 June 65 puts at 1.76 and bought 550 June 85 calls at 1.16 for a credit of 0.60 or 33,000.


Risk/Reward
As you can see from the risk/reward graph above, the bull reversal profits from an increase in the underlying stock. The maximum risk is being put 55,000 shares of stock if the underlying stock is trading at or below 64.4. The maximum profit potential is unlimited. This bull reversal is done for a credit, therefore, if both options expire worthless, the trader's profit is the credit received.


The line shown in the chart above is the lower break even price of 64.4. V has not dropped below this level since August of 2009. The 52-week range is a low of 64.9 and a high of 97.2. Visa reported quarterly earnings February 2. Visa Inc. reported a 16% increase in quarterly profit late Wednesday as the company processed more payments.

Visa traded 34,726 contracts today with an average volume of 36,799. Net deltas for calls was 180,000 and net deltas for puts was 33,000. Net premium for calls was 292,000 and net premium for puts is -230,000.

Visa's biggest competitors include American Express (AXP), MasterCard (MA), and Discover (DFS). Of the four companies, Visa has the highest price to earnings ratio (20) and the highest market cap (61.51B)

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