Inspired by Rocco Pendola and Robert Weinstein to go out on a limb and invite readers into their trading positions - which has been tantamount to painting a target on their backs - I want to go through my foray into trading MasterCard (NYSE:MA), especially since it has declined of late and my position is at risk.
As everyone knows, MA processes electronic financial transactions primarily in the form of credit cards ... in fact, they process a LOT of credit card transactions. According to their fact sheet they processed 23.1 billion transactions last year with a gross dollar value of $2.7 trillion. The number of transactions is significant because that translates to just over 2.6 million per hour. They claim to have the capacity to process 160 million per hour. Therefore, not a lot of cost increase to significantly increase their revenue stream.
Consumers will continue to use credit and debit cards as well as make electronic, Internet and mobile payments, such as Google Wallet, all of which can be processed by MasterCard. Thus, the market is promising.
Fundamentally, MA has increasing revenues, net income, free cash flow and has no long-term debt. Their valuation statistics are at or above their industry. They have grown via acquisitions of late. The only blemish on its otherwise stellar income statement is the litigation settlement with Discover (NYSE:DFS) and American Express (NYSE:AXP) in 2008. G&A expenses are contained via cost control measures according to their 10-K and latest 10-Q.
Technically, MA has recent primary support at $358 and a secondary level at $345. There is resistance at $385. The stock fell below its 100-day EMA on Friday, Jan 6 and settled at $342.92. However, in looking back over the past several months since the August market decline, almost every time the stock has found a cyclical low it has bounced back 6-11%. It also has a relatively low beta of 0.51.
Now, with all that said, I am a trader and not an investor. I look to take high probability of success credit trades that last only 4-6 weeks. I also use cash-secured naked puts to enter stock positions, and if assigned, use covered calls until I can exit the position at a profit.
I have a Jan. 2012 340/345 bull put that I entered on 12/22/2011 when the stock was at $371.07. My short strike was 7.6% below the current stock price and further represented a 0.73 standard deviation margin. Historically, the price had only travelled the distance of the current price and my short strike, within my trading horizon of 29 days, 16.8% of the time since 2006. So, I had about an 83% probability of success on this trade.
I am trading 3 bull puts (6 total option contracts) and entered the trade with a $0.65 credit - total $195. Because of its recent decline, I can exit for about a $2.30 debit or a $1.65 loss. Implied volatility has increased from 29% to 33% making the options even that much more expensive. So do I get out?
Since I am a trader and not an investor, technicals are my primary source of decision-making information. Based on the aforementioned bounces after cyclical declines and that the stock has a low beta, I am going to hang in there for a while longer. First of all, I have been trading MA for several months and have some winners already booked. Secondly, this is a defined-risk trade, my maximum loss is $1,305, which would not be pleasant, but also would not wipe me out. Thirdly, theta is eating the extrinsic value each day and the longer I wait, assuming it does not penetrate my long puts, I may even be able to exit at break-even or a small profit. And, I am looking for the bounce and if accomplished, my options expire worthless and I keep my $195.
The point of this exercise is to allow the reader to enter into the decision-making and emotional tug-of-war of a trader in essentially real-time. It is easy to state that one should "just hang in there" or "exit the trade at a loss and move on" until you are staring at the decision in the face.
For anybody interested, I will post in the Comments section my periodic decisions and emotional trauma until I either exit or Jan expiration.