Mastercard Earnings Play with Options

• Posted by Greg Harmon
• on August 2nd, 2011

Mastercard ($MA) reports earnings before the open tomorrow. Leading into it Tuesday the stock has been in a bull flag for a month between 300 and 320. Now it is in the lower end of the flag. The Relative Strength Index (RSI) is hovering over the mid line, trying to hold, and the Moving Average

Convergence Divergence (MACD) is negative but flattening. It sets up to go either way but since it ran higher into the flag maybe a slight bias to the upside. But the market as a whole is set up against it and its major rival, Visa, (ticker: $V) has been having a bit of a hard time since it released earnings last week. I want to play this with the market but I do not want to pay for the short exposure if possible. There is support to the downside at 288 and then at 280 and 270 should it fall below 300 after earnings. Looking at the options board the Implied Volatility is not that elevated, so a volatility sell is not going to do much. Instead I will play a 1×2 ratio put spread to gain some won side exposure and reduce the cost.

Trade Idea: Buy 1×2 Ratio Put Spread August 295×290/275

By buying the 295 Put and selling the 290 Put I get $5 of down side exposure. If it falls through 300 there is no real support before 288 so I expect to collect the full $5. To reduce the cost I also sell a downside 275 Put. If the stock closes below 275 on August expiry then I will be put the stock with a 270 basis (275 cost less the $5 from the put spread). That level would be over a 10% pullback from the current level and at the base from April through June. The ratio spread was quoted at -90 cents by 10 cents as I wrote this an hour before the close.

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

If you like what you see above sign up for deeper analysis and trading strategy by using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits page.

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.

blog comments powered by Disqus