Spread Players Position on Visa, Inc. (V)

02/19/2010 12:01 am EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

Visa Inc. (V) has been targeted by spread players with two very different strategies crossing the tape in yesterday’s trading. While one is geared toward shareholders looking to preserve paper profits, the other spread is a bet that V will pull back prior to February expiration.

V price chartFirst up, a block of 496 contracts crossed the tape on V's June 100 call at the bid price of $0.93 earlier today. Simultaneously, a matching block of 496 contracts changed hands on the stock's June 70 put for the ask price of $1.02. Judging by this data, the trader appears to have sold the out-of-the-money calls and purchased the out-of-the-money puts.

In this strategy, known as a collar, stock investors can protect their paper profits by locking in a favorable exit price. If V should dip dramatically by June expiration, the trader has purchased the right to sell his shares at no lower than $70 apiece.

Meanwhile, the sale of the overhead calls lowers the cost of this put protection— but also caps the investor's ability to profit from any additional upside beyond the sold strike price of $100.

Elsewhere in today's trading, one skeptical speculator opened a short call spread on V by selling 400 February 85 calls and purchasing 400 February 90 calls. This trade was opened for a net credit of $1.45, which is also the maximum potential profit on the position.

In this neutral-to-bearish spread, the speculator is looking for V to finish at or below the sold 85 strike by the time February-dated options expire at the close of Friday's trading. This will allow both options to expire worthless, with no further action required to exit the spread. In this scenario, the purchased calls serve only as a hedge to limit the trader's risk in the event of an unexpected rally.

From a technical perspective, V has recently pulled back from double-top resistance in the $90 neighborhood. However, the shares are still maintaining solid support from their ten- and 20-week moving averages, which haven't been breached on a weekly closing basis since July 2009.

By Elizabeth Harrow of Schaeffer’s Trading Floor Blog

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