187% Annualized Selling MasterCard Vertical Spreads

May. 7.12 | About: MasterCard Incorporated (MA)

As a follow-up to my introductory post, here is another example trade I made in Mastercard (NYSE:MA), and how I managed it along the way.

3/6/12

Stock had recently broken out of resistance around 400 and pulled back just above that area, which also lined up with the 20-day sma (the dotted line in the center of the Bollinger band. I was looking for a bounce in this area, or at least strong resistance.

I placed the short strike just above the lower Bollinger band. My broker's option analysis tool said I had an 73.8% probability of max profit. This is a little more aggressive than I like to get but the technicals were solid.

Trade:

Sold MA Apr 12 385/380 put spreads for ($6.20-$5.21) x 100 x 2 spreads = $99 premium received

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3/8/12

Two days later the stock popped up to ~419. Using the upper trendline in the chart above for resistance, I sold credit call spreads to form an iron condor with my put spreads. I was looking at a probability of max profit of 87% with this trade.

Trade:

Sold MA Apr 12 455/460 call spreads for ($1.73-$1.27) x 100 x 2 spreads = $92 premium received

3/26/12

The stock hit the 20-day sma again and bounced. Decided to use this opportunity to repurchase the put spreads with the intention of redeploying them to higher strikes.

Trade:

Bought to Close (BTC) MA Apr 12 385/380 put spreads for ($0.73-$0.63) x 100 x 2 spreads = $10 cost vs. $99 credit = $89 profit

Note that this $89 profit was against $1000 in margin and achieved in 20 calendar days. That's almost 375% annualized.

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3/27/12

Well the very next day I got the pullback I was looking for. Again used the new breakout area of ~430 as support.

I placed the short strike underneath the lower Bollinger band, and around where the 50-day sma would be shortly. Also stayed underneath the trendline from the post-earnings move. OptionsHouse says an 87.4% probability of max profit. Could have gotten a little more aggressive with this one but I was happy with my 10% ROI, especially having already taken a profit and having call spreads on means I didn't need to use up any additional margin.

Trade:

Sold MA Apr 12 405/400 put spreads for ($1.96-$1.46) x 100 x 2 spreads = $100 premium received

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4/4/12

I added to the put side of the iron condor I had on. The rising trendline continued to hold, though it flattened out a little with the lows on 3/30 & 4/2. There was also high call OI at 425, so I looked for stock to end up somewhere close to that on April opex. Probability of max profit was at 88.4%.

Trade:

Sold MA Apr 12 405/400 put spreads for ($1.64-$1.21) x 100 x 3 spreads = $139 premium received

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4/10/12

Again I added more to the put side of the iron condor. Trendline was still intact, but continued to flatten. I felt confident being that flatter trendlines are more likely to hold anyway. Also, stock was showing no signs of pulling back. I was, however getting nervous that the call spreads would be in danger.

Trade:

Sold MA Apr 12 405/400 put spreads for ($1.74-$1.29) x 100 x 5 spreads = $225 premium received

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4/17/12

Closed all the spreads out with the stock at ~438 for a total profit of $522. That's almost 94% of the max possible profit. I always feel it's better to take the money and run than risk holding for another 3 days just to save the 34 bucks and commissions, especially with the market being so chaotic at that time.

Trade:

Bought MA Apr 12 put spreads for ($0.24-$0.21) x 100 x 10 spreads = $30 cost vs. $464 credit = $434 profit

Bought MA Apr 12 call spreads for ($0.17-$0.15) x 100 x 2 spreads = $4 cost vs. $92 credit = $88 profit

Combine this with the $89 profit from the initial trade, and I made a total of $611 against $5000 in margin for a 12% ROI in about 40 calendar days, or 187% annualized. And the whole time I had better than 80% chance of it being a winning trade.

(Note that commissions are not taken into account in any of these trades as they will vary greatly depending on your broker.)

Now here is a setup for Visa (NYSE:V) that I'm looking at:

The stock sold off hard even after beating earnings recently. Quite a lot of that going on lately. Similar entry as in Mastercard. Lost the rising support trendline from February. Prior to this it was putting in new all-time highs every few weeks.

Going to wait and see what happens next week. Should the stock regain the trendline and start trading back in the channel, I'll be looking to sell the 110 puts and buy the 105s. Probably won't be enough premium left in May options so I'll price out June spreads.

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Disclosure: I am long MA. Long MA via credit put spreads. May initiate a new position in V credit put spreads.