Options Update: Are Options Players Giving Visa any Credit?

• July 15, 2008
• Mark Fightmaster

Go World

It’s the new advertising campaign surrounding the Olympic games for mega-sponsor Visa
– you hear the mellifluous tones of Morgan Freeman dripping off his silky-smooth vocal chords. He reminisces about great moments in Olympic history. The most poignant of these commercials is the one for Derek Redmond – watch the spot and tell me that you don’t have goosebumps and watery eyes. While these ads occupy a good portion of the ad spots during my weekend sports-viewing menu, it is only going to get worse. When the Olympics begin, bet your bottom dollar that you will be seeing plenty of commercials featuring the likes of Keri Strug, Bob Beamon, Nastia Liukin, and Michael Phelps. Of course, when it is the voice of Morgan Freeman discussing these athletes’ feats, I can sacrifice the time to watch.

V is on the minds of options players today, and my guess it isn’t because of the new series of commercials. The stock is more than 3.5% lower at last check, hovering near the 70 level. The only reason I can find is that the stock may be caught up in general market weakness and concerns over the health of the economy. Nevertheless, the drop has prompted a good deal of option activity – which is what caught my eye today.

According to today’s Intraday Volume Explosion List, the heavy option activity on V is on the call side of the arena and focuses on the stock’s short-term prospects. A normal trading session sees 8,860 total call contracts trade on V. But volume has more than doubled today with 22,491 contracts traded. Most of this activity has fallen on the July 70 call (V GN), with volume of 5,127 contracts.

The activity on this contract is small in nature, with no 4-digit transactions. With the contract itself trading more than $1.50 lower, I’m guessing we are seeing a lot of individual investors jumping ship. This may be a prudent short-term move, as the stock could see this round-number level act as resistance. That said, overhead open interest at the 70 level is minimal – peak call open interest for the July series resides at the 85 level. There is some room to run should the stock top the 70 level.

Getting Credit from Analysts

According to Zacks, analysts are somewhat optimistic toward V. The credit king receives 7 “strong buys,” 2 “buys,” and 7 “holds.” Yes, there is a chance for downgrades from the 7 ultrabulls, but it is more likely for the 7 “hold” ratings to be upgraded. However, what are the chances of upgrades or downgrades before Friday (July expiration) – which could help or hinder our hypothetical option sellers?

As for option players, we don’t have enough Schaeffer’s put/call open interest ratio (SOIR) readings to determine a an annual percentile rank for V’s reading. The reading itself (0.48) indicates that calls basically double puts in the front 3 months of options, which is inherently bullish. Of course, some investigation suggests that this reading is close to the middle of the past 3-month’s worth of readings.

Credit Where Credit is Due?

Bottom line: are the 7 “strong buy” and 2 “buy” readings justified? Honestly, it is tough to tell – mainly because V is a rather new stock. Going back any further than a daily chart for V doesn’t make much sense, let’s focus on the short-term performance and prospects.

V faces its fair share of overhead resistance, especially considering that the stock has slipped 13% during the past 4 weeks. Should the stock rebound off the 70 level (which may be happening right now), it is going to face overhead resistance at the 75 level. Further resistance could come from V’s descending 10-week moving average, which is positioned at the 76 level. If these 2 potential layers of resistance combine, it could be a hurdle that the stock finds too high to clear.

Further north lies V’s 20-day moving average, which is currently dropping through the 79 region. If the stock manages to topple this trendline, it then faces resistance from the 80 level – an area of former support.

The Verdict? The stock is in the midst of a downtrend and faces a decent amount of pessimism. Does this make it an ideal contrarian bearish play? Close, but I am wary to choose a position on V given the fact that there is no long-term trend to examine. And what of the company’s earnings report on July 30 and the target price of $83.94 (according to Thomson One)? While it will be tough to break through the overhead resistance, stronger-than-expected earnings could propel the stock higher. The bad thing is that there isn’t a great deal of pessimism to unwind and push the stock northward. V is a tough call for this contrarian, although others may think it is a good bearish play.

If you have any questions or comments, make sure to email me. I will do my best to answer your question or address your concern.

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