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Friday, January 21, 2011

The flying V (Visa)

Visa has been crushed in recent weeks because of pending legislation to limit the amount of fee's that debit card issuers can charge. This has driven visa down to a 52 week low of 67.50 recently. This has probably been blown out of proportion and will hurt banks more than it will hurt Visa. Visa has been delivering 20% earnings growth and shows no sign of letting up. As more people switch from cash to plastic, this should only help Visa out that much more. The best and least risky way to play this bargain is with a buy-write.

Buy 100 V @ 70.69:           (7,069)
Sell 1 V Jan 12 72.5 Call:     750
Sell 1 V Jan 12 75 Put:         1,000
Total cash outlay:                $5,319

Total return if V > 75 on Jan 2012:  $1,931 or   35% return on a stock that needs to go up by 6% in 11.5 mos      

Break Even:  $65 so you have downside protection of 8%

If V is < 75 in Jan 12, your short put will be exercised and you will have to buy 100 shares at a net price of $65, which probably isn't a bad thing.

The 1 yr target estimate via Yahoo! Finance is 96.27



Ben said...

I initiated this trade in my virtual portfolio. I will update and adjust as needed.

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