When looking at bullish exposure, you can go with a single-leg option strategy such as buying a call or selling a put. Or you could create a spread with your options. Here's a diagonal spread setup for Visa stock. You give up some upside exposure but it also reduces your risk.
Dow Jones Component Nears Buy Range
Visa recently appeared as a Dow Jones component near a buy range as it sits near a 220.08 entry. Shares formed a base for all of 2022, but Visa stock is now above its 21-, 50- and 200-day moving averages. Plus, the 21- and 50- day lines are rising.
According to IBD Stock Checkup, V stock is ranked No. 6 in its group and has a Composite Rating of 92, an EPS Rating of 92 and a Relative Strength Rating of 82.
Let's take a look at how we can use options to find a favorable risk-to-reward trade on the assumption that Visa stock might move up 1% to 10% in the next four weeks.
A bullish diagonal spread allows traders to get long Visa stock without risking too much capital.
Setting Up The Diagonal Spread On Visa Stock
A bullish diagonal spread involves buying a call option and selling a shorter-term, out-of-the-money call option against it.
The March 17, 210-strike call cost around 18.15 yesterday. Buying it sets up your long exposure.
Then selling the Feb. 17 call with a 225 strike helps reduce the risk. That traded for 6.05 yesterday and helps offset your cost.
The net result costs 12.10 per spread, which amounts to $1,210 when multiplied by 100 shares per contract. This is also the most the trade can lose.
The maximum profit is a little trickier to calculate on diagonal spreads. It's estimated at around $500, but that can vary depending on changes in implied volatility. The maximum profit occurs if Visa stock closes right at 225 on Feb. 17.
Why Create A Diagonal Spread?
The idea with the trade is that if Visa stock trades up to around 225, the diagonal spread increases and results in a net profit.
A bullish diagonal spread is a good way to gain some upside exposure on a stock without risking too much if the move doesn't eventuate.
The combined position has a net delta of 26. That means the trade is roughly equivalent to owning 26 shares of Visa stock. But that can change as the trade progresses.
A suggested stop loss level is a close below 215 for Visa stock. That could suggest it's falling back into its base and needs more time.
Visa stock is due to report earnings after the close on Jan. 26, so this trade has exposure to earnings if held beyond that date.
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
