Mastercard Incorporated (NYSE: MA) stock is falling with other credit card companies as the Senate Homeland Security and Governmental Affairs subcommittee opens hearings this morning to investigate how companies raise individual consumers' interest rates with little notice even as consumers pay bills regularly and promptly and their individual credit scores decline. Subcommittee chair Carl Levin, D-Mich., may use the potential of legislation to induce the credit card companies to change their practice of increasing interest rates on short notice. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on MA.After hitting a one-year low of $90.50 last December, MA hit a one-year high of $206.43 last week. This morning, MA opened at $200.00. So far today the stock has hit a low of $197.10 and a high of $200.92. As of 11:50, MA is trading at $198.41, down $3.47 (-1.7%). The chart for MA looks bullish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bearish hedged play on this stock, I would consider a January bear-call credit spread above the $260 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in 7 weeks as long as MA is below $260 at January expiration. MasterCard would have to rise by more than 31% before we would start to lose money.
MA hasn't been above $210 ever and has shown resistance around $206 recently. This trade could be risky if the financial situation turns around, but even if that happens, this position could be protected by high energy costs eating into consumers' budgets.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in MA.
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Reader Comments (Page 1 of 1)
12-08-2007 @ 5:42PM
Ed Nowak said...
So if you're bearish on the stock, you recommend selling a 7-week call spread 30% out of the money?? Virtually worthless advice, even if you had specified an exact spread. Can I have the last 2 minutes of my life back?