Forget about Greece, Portugal, China, and every other country that’s making news these days…
The fallout from current (and likely future) debt crises will lead to turbulence in the markets, but it’s the inevitable recovery that interests me right now.[ad#Google Adsense 336×280-IA]We’ve seen this setup before.
In every case where financial misadventure leads to bailouts, one thing is clear: Though the short-term movement of the stock market might lurch to the downside, it has always recovered.
And the American blue chips always lead that recovery. That’s where our big opportunity is today…
The American Consumer Hands Us Our Play
So with all the attention these days across the pond, I thought it would make sense to discuss a certain blue-chip company that just keeps on moving up, in both good times and bad.
Visa Inc. (NYSE: V) is one of those companies that looks like a printing press.
Along with insurance and healthcare, this finance segment just won’t quit.
Ever since 2008, unsecured credit has once again loosened up. Millions of adults all hold an average credit card debt in excess of $5000, and they pay, on average, 18% for the privilege.
With a flood of cheap money buoying financials, this means fat margins for companies like Visa.
Monetary policy is going to stay loose for a long time to come, on the order of years, while the economy inches back into positive territory. In these conditions, the American consumer can be counted on to pile on the debt.
As bullish as that is, the technicals for Visa look even better right now…
The “DarkNet” Loves These Shares Right Now
Looking at the graph [above], you can see that Visa is at the bottom of an upward channel. That signals support.
It looks very possible that the next few weeks could see new highs for the year, in the low $70s range.
It’s helpful to look at how the pros, veteran stock and options traders, would approach Visa as a buying opportunity in the next 30 days.
A stock trader would look at Visa’s current price of $67.50 and, with a target price (recent high) of $70, would do a little math like this:
Current Price: $67.50
Target Price: $70.50
Profit Opportunity: 3 points, or a 4% return
A 4% return on a stock in 30 days would absolutely trounce the S&P 500, which just scraped out its smallest first-half gain in history. And the annualized return of 48% looks even better.
But… There’s a way we can pocket nearly 50% in gains over that same 30-day period if the stock moves to $70.50.
Lower Risk and Leverage Your Investment with a Classic Call Strategy
The long call strategy provides unlimited profit potential with limited risk. It is best used in a bullish market when a rise in the price of the underlying asset above the breakeven is anticipated.
Zero margin borrowing is allowed. That means that you don’t have to hold any margin in your account to place the trade. You only pay the option’s premium – a fairly small investment depending on the market you choose to trade.
Here’s the specific long call strategy for Visa.
The stock is currently trading near $67.50 and the Visa July (Week 5) 2015 $64.50 call (V150731C00645000) has an asking price of $4.30. The chart shows the risk for this basic option strategy as the price paid for the call option, in this case $4.02, or $402 per contract, before commissions.
Now let’s take a look and see how the options prices change with movement in Visa stock.
Again, this option price is $4.02 for a total cost of just $402 plus commissions. The maximum risk is the price of the option ($402). The maximum reward is unlimited to the upside as Visa stock continues to rise.
The breakeven is calculated by adding the strike price ($64.5) to the premium of the call option ($4.02). In this example, the breakeven is $68.52 ($64.50 + $4.02 = $68.52).
In this case study, we are looking for Visa to move back to the old highs of $70.50. If we hit $70.50, the minimum value of the options would be worth $600 – close to a 50% return for us. Of course, the upside is considered unlimited, but as an options trader, I concentrate on a price such as a recent high to gauge return from.
So while the rest of the world boils in unrest, as options traders, we can stay cool and take small positions and leverage them for big potential profits, all while keeping cost and risk in check.
— Tom Gentile[ad#IPM-article]
Source: Money Morning