Options Update: Visa Inc. Traders Begin Positioning Ahead of Earnings

Last week, Visa Inc.
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announced that it would release its fiscal first-quarter earnings results after the market close on Feb. 4, 2009.

Currently, analysts are forecasting a profit of 66 cents per share from the credit card titan, up sharply from last year’s breakeven results. Historically, V has matched or beaten Wall Street’s views in each of the past 4 reporting periods, with an average upside surprise of about 12.4%.

Calls are the investment vehicle of choice as V’s earnings report looms. Currently, the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.40 rests at its second lowest level since the stock went public in March 2008. What’s more, the International Securities Exchange (ISE) and Chicago Board Options Exchange’s combined 10-day call/put ratio of 1.29 underscores a preference for bought-to-open calls over purchased puts during the past 2 weeks.

In today’s trading, it seems that options traders are beginning to position themselves in earnest ahead of the event. Visa’s call volume has surged to more than 25,000 contracts, outpacing the stock’s average daily call volume by nearly 6 to 1 and placing the stock on today’s Intraday Volume Explosion List. Digging into this flood of options reveals that the most active contract is the deep out of the money February 65 strike.

Visa option volume details

The Anatomy of a Visa Call Positions

Given the ISE/CBOE data above, I was a bit startled to see that nearly all of today’s more than 19,600 calls that changed hands on V’s February 65 call appeared to have been sold. Open interest at this option totals a mere 17,416 contracts, lending credence to the idea that the stock was targeted by sell-to-open call positions. A call-sell position is similar to a put-sell, except that the trader needs the shares to remain below the sold call through expiration in order to keep the premium received. As you might have guessed, I will be running with a call-selling theme this afternoon.

Specifically, a block of 17,579 February 65 V calls traded at the bid price of $0.60 at 10:04 a.m. Eastern time, netting the trader a total credit of $1,054,740 — ($0.60 * 100)*17,579 = $1,054,740. As noted above, the call-sell trader keeps the premium received on the trade as long as the underlying shares remain below the sold strike through expiration, which, in this case, is Feb. 15, 2009.

By entering this trade, the investor is indicating 1 of 2 things: that he expects V to remain below $65 per share through expiration, or that he wishes to sell the stock at $65 per share. In today’s trading, the stock has fallen nearly 3% and is threatening short-term support at its 10-day and 20-day moving averages. Let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.

Getting Technical

Rallying alongside the broader market, V has gained more than 24% since setting an all-time low in late-November 2008. Despite the momentum, the shares have been unable to break out above technical resistance at the 58 level. What’s more, V’s declining 20-week moving average has descended into the region and could create additional problems for the equity. V has not closed a week above this trendline since its inception in August 2008.

Additionally, the selection of the 65 strike as the site of the sold call greatly benefits any V shareholder looking to maintain exposure to the shares. This region is home to former support for the security, which could create a ceiling for any sharp rallies in the shares. As such, a February 65 call allows a V shareholder to retain their shares, while capturing premium on their underperforming holdings.

That said, put buyers should pay close attention to building short-term support in the 52 region, as well as the stock’s rising 10-week moving average. V has not closed a week below this intermediate-term trendline since the last week of November 2008. This double-barreled support could place quite a crimp in any outright bearish position on the equity heading into February’s earnings report.

Weekly chart of Visa since March 2008 with 10-week and 20-week moving averages

The Sentiment Drivers

While the technical backdrop favors a call seller due to the staunch overhead technical resistance and potential for support in the 52 area, V’s sentiment backdrop is skewed in favor of put buyers. As noted above, options traders are betting heavily in favor of an extended rally in the shares. Wall Street analysts are echoing this cry, as 12 of the 20 brokerage firms following V rate the shares a “buy” or better. Meanwhile, short sellers have largely ignored the security, as only 1.5% of the stock’s float is sold short.

Sentiment indicators for Visa

The Verdict?

Should Visa disappoint investors with its first-quarter earnings report, we could see bullish sentiment levied against the shares unwind in the form of added selling pressure. This exodus of optimism could amplify in magnitude if the stock breaches technical support near its 10-week trendline and the 52 level. Such a move does not greatly affect today’s call-selling example, as the trader would keep his premium as long as V remains below the 65 level.

That said, if you do not own the shares, the technical and sentiment indicators above suggest that greater returns could be had by playing a put position on the shares. This is especially true if V rallies back into overhead resistance near the 56-58 region prior to the company’s earnings report.

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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.