Payment giant Visa will report its fiscal fourth-quarter earnings Tuesday. Analyst estimates are for EPS of $1.87 on sales of $7.56 billion.
Investors who think there is a chance of a big beat and strong market rebound can consider buying a 195-strike call option on Visa stock for the Nov. 4 expiry. This call can currently be bought for around $2.80. It also equates to a maximum loss of $280 on expiration if Visa is trading below 195 on expiry.
In the event of a strong rally, profits are potentially uncapped.
The 195 call on Visa stock is currently trading with an implied volatility of 37.5%. This call may seem expensive if you compare implied volatility to its past volatility (30.5% and 34.5% over the past 30 and 252 days, respectively). But it may actually be cheap if you consider the upcoming catalysts.
Visa To Report Earnings Tuesday
Visa's earnings after the close on Tuesday will be the first source of volatility.
The market is currently pricing in a 4.1% move on the event. While Visa's earnings announcements have been uneventful in the past — averaging a move of just 3.1% — they have heated up recently. The stock has moved 6.5% on average over the last four quarterly reports.
There seems to be no reason Visa stock would move less this quarter, especially since its competitor Mastercard is implying a high earnings move as well. That's despite the fact that its earnings are typically less volatile than Visa's.
The Federal Reserve's next meeting is the week after Visa's earnings announcement, which could be an additional source of volatility for the Nov. 4 options.
Given the strong upside moves we have recently had in the S&P 500, it is certainly possible to see similar moves. The market is pricing the potential of this with low put skew on the major indexes.
Good Chance Option Will Expire Worthless
If these events lead to upside volatility in Visa, investors could multiply their investment several times over. However, because this call is out of the money — with a delta of only 30 — there is a large chance the option will expire worthless.
The advantage of buying a call option over stock is that the loss is limited to just the debit, which creates an attractive risk-to-reward profile.
Visa stock has an IBD Composite Rating of 83, with a strong EPS Rating of 94. Shares are down over 15% year-to-date, principally on global growth concerns.
