Mastercard (MA) - Get Report shares rallied Friday following the company's earnings report, but the move was probably exaggerated and the stock should move lower again in the near term. Traders can profit from such a move using stock options.
The stock gained $3.30, or 3.2%, on Friday to close at $106.90. Shares gained more ground Monday morning and were changing hands around $107.34 shortly before noon EDT.
MasterCard reported adjusted earnings per share of $1.08, topping the Wall Street consensus for 98 cents. Revenue came in at $2.89 billion, vs. expectations for $2.75 billion.
Even with these positive results, the jump in price, to a 52-week high, is exaggerated. The price chart shows why.
The stock's price gapped strongly above the upper Bollinger Band. When this happens, it invariably retreats back into range. In addition, price had been trending in a positive channel. The upper Bollinger Band represented dynamic resistance and the t-line (eight-day exponential moving average) was support. The big jump out of this channel is the red flag on this chart. This is confirmed by the volume spike and movement in the relative strength index above 70, a level that typically indicates a stock is overbought.
This leads to an observation that in the very short term, the stock's price is likely to retreat back to the established channel. And in the long term, this stock continues to look bullish. This is the ideal situation for a calendar spread using stock options.
This can be set up with the following trades, based on Friday's closing prices:
Buy the Nov. 4 107 put option at an ask price of 1.15. Including trading fees, the total cost is $124.
Sell the Nov. 11 107 put option at a bid of 1.30. Subtracting trading fees, you'll receive a credit of $121.
The total net debit of this trade is $3.
For such a small net debit, this strategy sets up a strong possibility of profits on both sides. This is based on the earnings reaction and likely correction, followed by a continued bullish trend. If the short put expiring in 11 days stays in the money, it can be closed or rolled to avoid exercise. However, with rapid time decay, the net value is most likely to decline over the next 11 days.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
Besides blogging atTheStreet.com,Michael Thomsett alsoblogs atOptions Money Maker,the Top Advisor's Corner atStockcharts.com, andSeeking Alpha.He has been trading options for 35 years and has published books with Palgrave Macmillan, Wiley, FT Press and Amacom, among other publishers.He is working on a new book on options math, to be published by Palgrave Macmillan in 2017.