MasterCard Incorporated (NYSE: MA) shares are rising following the Federal Reserve's announcement that it will make $200 billion worth of Treasury securities to financial institutions in an effort to stave off a recession and fight the credit crunch. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on MA.
After hitting a one-year low of $101.39 last March, the stock hit a one-year high of $227.18 in December. MA opened this morning at $194.90. So far today the stock has hit a low of $193.92 and a high of $196.99. As of 12:05, MA is trading at $194.03, up $2.53 (1.3%). The chart for MA looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider an April bull-put credit spread below the $160 range. A bull-put credit spread is an options position that combines the purchase and sale of put 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 6.4% return in just one and a half months as long as MA is above $160 at April expiration. MasterCard would have to fall by more than 17% before we would start to lose money.
MA hasn't been below $160 since November and has shown support around $189 recently. This trade could be risky if the credit situation continues to worsen, but even if that happens, this position could be protected by the support the stock might find at its 200-day moving average, which is around $170 and rising.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in MA.
Closing Bell: Can't go up every day (BAC, HE, HPW, COMS, BRCD, WMT, AMD)
Wal-Mart grows profit and cash flow in Q3, but comps still ailing
Chasing Value: Ten stocks for 2010 -- Part 2
