Credit Card Roulette or Smart Prep
- Posted by Greg Harmon
- on November 1st, 2011
Mastercard, $MA, reports earnings Wednesday morning before the market opens. As it heads into earnings it printed a double top at 355 and gapped lower on Tuesday. The inverted hammer candle just above the 50 day Simple Moving Average (SMA) may be a signal of support and a move back higher. The 50 day SMA has been support often in the run higher since February. But the chart also shows that while the Relative Strength Index (RSI) is moving sharply lower towards the mid
line, but remains bullish, the Moving Average Convergence Divergence (MACD) is fading, towards a bearish cross. All of the SMA’s are rising supporting an upward trend bias. But with the catalyst of earnings coming a possibility of a fall back to support at 300 is not out of the question. The options market prices in a move of about $23 or 6.8% by Friday from the at-the-money Straddles on the weekly options. That makes for a range of about 314 to 350. With the weekly volatility elevated at over 100% we looked at a lot of different options trades for earnings to try to capture that volatility through a option sale but without a bias in the direction of the move of the stock the reward to risk was not favorable enough to cover both directions. Now the only option is to wait for earnings and trade the reaction. Well that is not exactly true. It is likely that the volatility will bleed off over the first 30 minutes of the day so a nimble trader may still be able to sell options against the direction of the move if they can price them accurately at the open. But at least be prepared for the anticipated move and understand the support and resistance to determine if there is an opportunity.
Another way to prepare for this to look at the reaction in Visa, $V. The chart for $V is nearly identical to $MA with the involvement of the 50 day SMA, RSI falling sharply and the MACD crossing negative, but rising SMA. The major difference is that the weekly options for $V only have Implied Volatility of about 45% since there is no earnings event for this company. This means that the opposite is true. A stock move in reaction to the $MA move is likely to be more fairly priced in the options.
This presents the possibility of using the proceed of sales of options premium shortly after the bell in $MA to buy options in $V. Again have your options levels and support and resistance ready to be able to a participate in this trade.
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Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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