Mastercard recently found support at its 50-day moving average and crossed above resistance around 400. If it stabilizes here, a put ratio spread offers away to profit on MA stock in multiple ways.
It has positive ratings. According to the IBD Stock Checkup, MA stock is ranked No. 5 in its industry group and has a Composite Rating of 91, an EPS Rating of 85 and a Relative Strength Rating of 85.
The put-ratio spread is generally considered a slightly bullish strategy. But it can potentially make a profit in up, down and sideways markets.
Yes, it can make money no matter which way the market goes. The key is the timing! Here's how you could set it up with MA stock.
Put-Ratio Spread On MA Stock
The put ratio spread involves buying a put option and selling two put options further out-of-the-money. Since the trade does involve a naked put option, it generally isn't suitable for beginners. But it can have its place within an option portfolio.
The trade is placed when the trader thinks the underlying stock will be stable and not drop below the short put strike at expiry.
A fall in implied volatility will benefit the trade and it can also be profitable if the stock moves up early in the trade.
The main risk with the trade is a sharp move lower early in the trade.
On Mastercard stock, we could buy the Oct. 20 put with a strike price of 410 for around 8.15 and sell 2 of the Oct. 20 puts at a strike of 400 with a price of 5.10 each.
As we are selling 2 contracts at 5.10 the net credit comes out to 2.05.
This is the maximum gain if MA stock price closes above 410 at expiration. Basically, all the puts expire worthless, and the trader keeps the $205 premium.
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This strategy should move fairly slowly unless there is a sharp drop in the stock price. The trade starts with a delta of 15, which means it is roughly equivalent to owning 15 shares of MA stock. This will change as the trade progresses.
Protecting Profits And Taking Profits
A tent-shaped profit zone exists between 388 and 410. The maximum gain occurs at 400. If MA stock closes at 400, the long put will have 10 points of profit and the short puts expire worthless allowing you to keep the credit. It gives you a total profit of about $1200.
If MA stock price falls below 400 at expiration, you eventually start degrading the profit. The short puts start moving against you. The break-even is at 387.95. Below that level, you have an uncovered short put and a potential loss of $38,795 in the unlikely case the stock went to zero.
In terms of a stop loss for this MA stock option trade, I would close it if I was down $400.
Last month, we looked at a similar put-ratio spread on Advanced Micro Devices. It worked well and can be closed early for a profit.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
