Visa stock is currently in a buy zone and looking very sound technically.
According to the IBD Stock Checkup, Visa stock is ranked No. in its industry group, and has a Composite Rating of 96, an EPS Rating of 93 and a Relative Strength Rating of 84.
Today, we're looking at a bull put spread. As a reminder, a bull put spread is a defined risk strategy, so you always know the worst-case scenario in advance.
This type of trade will profit if Visa stock trades sideways or higher and even sometimes if it trades slightly lower.
With Visa trading around 231, if we use the June 16 expiration, we could sell a 220 put and buy a 215 put for around $0.75 late Friday.
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Trade Generates $75 In Premium
Selling this spread would generate roughly $75 in premium with a maximum risk of $425.
If the spread expires worthless, that would be a 17.65% return in just over one month, provided Visa stock is above 220 at expiration.
The maximum loss would occur if V stock closes below 215 on June 16. That would see the premium seller lose $425 on the trade.
The break-even point for the trade is 219.25, which is calculated as 220 less the $0.75 option premium per contract.
Set Stop Loss To Avoid Big Damage
I would set a stop loss if Visa stock drops below 220. Otherwise, another good rule of thumb is to limit the loss to the amount of premium received. In this case, that would be $75.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
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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
