Visa Earnings Trade, Buy Write and Some

As earnings approach Wednesday night for Visa (ticker: $V) presents some interesting opportunities. Let’s start with the daily chart below.

The Set Up

It had an enormous jump June 29th on news and has been in a bull flag between 88 and 90 since. Notice following that jump the Bollinger bands expanded to over 30 points but with earnings tonight

Visa, $V daily

they are back to only 5, ready for a move. The Fibonacci levels to the left of the chart are measured from THE March 2009 lows. There is resistance to the upside at 92.50 before retesting the 2010 high at 96.32 and there is support lower at 87.50, just under the flag and then again at 81.00. The weekly chart shows the bull flag as text book with the Relative Strength Index (RSI) pulling back slightly and the Moving Average Convergence Divergence (MACD) still solidly positive with declining volume. I am biased to the upside but worry about earnings.

Visa, $V weekly

The Trade

This leaves me looking for a long set up but with downside protection for the earnings event. I can get this by doing a buy – write trade on $V and buying an extra downside put.

Trade: Buy-Write $V August 90 Strike Calls plus a July 87.50 Put

Buying the Stock and simultaneously selling a August 90 Strike Call (Buy-Write) gives me capped upside exposure at about $2 less than the current stock price. This part of the trade alone could return over 4% by August expiry if the stock closes over 90. If it closes at less than 90 then I would still be long the stock. But with the earnings wild card thrown in, I want downside protection so adding the July 87.5 Put for about $1 gives me at the money protection for the event, and still gives me a basis in the stock $1 below the current price. With this higher basis the potential return for August is reduced to just over 3% capped, still a good return for just over 3 weeks. I posted earlier that I entered the combination at 87.42 and see it currently available at about 87.50.

Post-Trade Plan

After earnings are announced the stock can either rise, stay put or fall and the trade must be reassessed for its risk-reward ratio then. If it rises look to sell the July put early Thursday to get back whatever you can as time decay is not on your side and review the buy-write to see if you can collect the majority of the gain immediately. In many cases collecting half if the return with over 3 weeks to go may be appealing versus risking the half already accrued. If it does not move then it m ay be prudent to hold steady retaining the downside protection. If it falls precipitously then look for a short term bottom to sell the Put for a gain, remember that time is against you with a 2 day option. It may also make sense to repurchase the 90 Strike call for August and sell a lower Strike 87.5 as an example, if the combination of buying the August 90 Call and selling the July 87.5 Put allows you to put money in your pocket.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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