Hedging in Visa: Options
By Jud Pyle, CFA, chief investment strategist for the Options News Network
CHICAGO (
) --During midday trading, an investor in
Visa
(V) - Get Report
sold off the upside of the stock to decrease the cost of downside protection in a long-dated collar spread.
The investor bought the Jan. 2011 70-85 risk reversal, selling the out-of-the-money Jan. 2011 85 calls and buying the out-of-the-money Jan. 2011 70 puts, 12,000 times for $5.30, with the stock trading at $70.50 a share. The Jan. 85 calls, currently trading up 20 cents on the day, have traded 12,000 times and are home to current open interest of 301 contracts.
The Jan. 70 puts have dropped 10 cents so far on the day and are home to current open interest of 288 contracts. Approximately 12,000 of these calls have changed hands so far today.
The volume-weighted average price of the Jan. 85 calls is $6, and the VWAP of the Jan. 70 puts is $11.30. That equates to a net cost of $5.30 for this collar.
V shares are currently trading up 40 cents to $70.50, and the heavy option activity we're seeing today does not seem to have a catalyst. This type of options activity is not necessarily all bearish. Remember, this could be an investor who is long the shares.
V has rallied strongly from its March low near $50, so the investor could just be hedging that position after the run in the stock. If that is the case, then this investor makes the most money if the stock rallies, because he or she is long the shares against the collar.
-- written by Jud Pyle in Chicago. Pyle is the chief investment strategist for Options News Network and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.
Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."
