Wednesday, June 8, 2011

Visa (V) - Vol Rising on Congressional Hearing

V is trading $77.44, down 3.0% with IV30™ up 5.9% as of ~9:50am EST. The Livevol® Pro Summary is included below.


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Visa Inc. (Visa), incorporated in May 2007, is a global payments technology company that connects consumers, businesses, banks and governments in more than 200 countries and territories, enabling them to use digital currency instead of cash and checks… You know, Visa…

I wrote about this one for (Options Profits) so no specific trade ideas here. But this is a cool one.

There is news, and here it is:
WASHINGTON (MarketWatch) — Senators will have to choose whether they support their local banks or their local retail outlets when they vote Wednesday afternoon on a measure that would delay the Federal Reserve from cutting debit card interchange costs.


Without the legislative change, the Fed is expected to adopt a proposal it introduced that would be a boon to retailers because it cuts debit interchange fees charged to them by an average of 73%. By one estimate, every month banks collect $1.3 billion in fees from U.S. consumers using debit cards mostly at retail outlets.

The Fed is required to adopt the rule — which significantly lowers costs for retail outlets like Wal-Mart Stores Inc. and Target Corp.— because of a provision inserted by Sen. Dick Durbin, an Illinois Democrat, into the sweeping Dodd-Frank bank reform legislation.
Source: MarketWatch

As a reminder to how big a deal this is for the credit card guys V and MA, let’s turn to the Charts Tab (the top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

I’ve highlighted the stock collapse for V on 12-16-2010. A quick news snippet from that day is included below:

The Federal Reserve released proposed limits on debit-card fees, offering alternative plans that would allow charges as high as 12 cents per transaction.

One of the proposals may set the cap as low as 7 cents, according to documents posted by the Fed today on its website.
Source: Bloomberg

On 12-15-2010, the IV30™ hit ~ 32, as of today it’s around 35 – so vol is elevated.

With more news due out today (maybe), the term structure shows elevated vol in the front relative to the back. Let’s turn to the Skew Tab.

This is a little tricky – note that the red curve represents the Jun10 weekly options – it’s the yellow curve that represents the Jun monthly options.

Ideally, when I see a term structure like this and no earnings event in the elevated months, a calendar spread feels reasonable. But in this case, given the large move that V made last time on potentially similar news, I can’t get a feel for “fair” vol. Do you want to own it or do you want to be short the gamma? How about neither?

For completeness, let’s look to the Options Tab.

We can see the three day straddle for V is priced at ~$4.60 fair value or ~ 75% annualized vol on a stock that has moved with HV180 at 26.94%. Yeah, that’s elevated… and it might not be enough.

This is trade analysis, not a recommendation.

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