Mastercard (MA) stock is sitting above the 200-day moving average and is rated a 40% Buy according to the Barchart Technical Opinion. The following trade will do well if the stock stays above 335 between now and April 6th.
The strategy is called a diagonal put spread and it’s an advanced strategy because it utilizes options over different expiration periods and different strike prices.
The strategy involves selling an out-of-the-money put for a near term expiry and then buying a put for around the same price using a later expiry.
The idea with the trade is that the stock might fall a little, but should stay above the short strike price.
Let’s look at an example using Mastercard.
Mastercard Diagonal Put Spread Example
The trade I’m looking at is selling a April 6 put with a strike price of 335 and buying an April 21 put with a strike price of 325.
As of yesterday’s close, the April 6th put could be sold for around $2.20 and the February 17th put could be bought for $2.90.
The trade would result in a net debit of $70.
The risk on the trade is on the downside with a potential maximum loss of $1070. This is calculated by taking the difference in the spread (10) multiplied by 100 and adding the premium paid (70).
The maximum potential gain is around $420 which would occur if MA closes right at 335 on April 6.
The trade has a nice profit zone in between 328 and 362.
Aiming for a return of around 10-15% makes sense and I would set a similar stop loss.
The worst-case scenario is a sharp drop in MA stock early in the trade. For this reason, if the stock drops below 335 in the next few days, I would also consider closing the trade early to minimize losses.
The initial trade set up has a delta of 2 meaning the position is roughly equivalent to owning 2 shares of MA stock. Note that this delta number can change significantly as the stock starts to move.
Below is the payoff graph with the blue line representing the profit or loss at expiration and the purple line being the trade as of today.
This is how the trade could look in around seven days time.
So, provided MA stock stays above 340 in the next seven days, the trade should be ok. As the trade requires the stock to not drop too much, this would not be an appropriate strategy for bearish traders.
Mastercard Company Details
Founded in 1966 and headquartered in Purchase, NY, Mastercard Inc. is a leading global payment solutions company that provides an array of services in support of credit, debit, mobile, web-based and contactless payments, and other related electronic payment programs to financial institutions and other entities.
The company's payment solutions include payment programs, marketing, product development, technology, processing, consulting and information services. It also provides worldwide transaction processing and other payment-related services, which include facilitating the authorization, clearing and settlement process of transactions, as well as processing cross-border and currency conversion transactions.
In May 2001, the company was incorporated as a Delaware stock corporation. Mastercard has one reportable operating segment, Payment Solutions.
The company manages and licenses payment card brands including MasterCard, Maestro and Cirrus.
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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
