Wednesday, July 31, 2013

Visa (V) - Volatility Explodes on Judge's Ruling; $16 Billion in Transaction Fees for Industry at Risk, MA Seems OK

V is trading $181.97, down 4.9% with IV30™ up 55.4%. The LIVEVOL® Pro Summary is below.

Visa Inc. (Visa) is a global payments technology company that connects consumers, businesses, banks and governments in more than 200 countries and territories to fast, secure and reliable electronic payments.

So the news / ruling is out today, and it's a good one for consumers and a bad one for debit card providers. In one of the greatest businesses of all time, debit card providers (read V, MA) basically take money from retailers just b/c they can in baby increments per transaction amounting to $16 billion annually in fees. Yeah, 'B'illion.

Here's the news from a great story in Bloomberg:


U.S. District Judge Richard Leon in Washington ruled today that the Fed considered data it wasn’t allowed to use in setting a 21-cent cap on debit-card transaction fees under the Dodd-Frank law. Leon said the rule, in effect since October 2011, would remain in place until the Fed drafts new regulations or interim standards.

“The board has clearly disregarded Congress’s statutory intent by inappropriately inflating all debit-card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit card transaction,” Leon said in his ruling.

The decision, unless overturned on appeal, will force regulators to revisit rules that bankers said would cost them 45 percent of their swipe-fee revenue. Lenders collected about $16 billion annually from those fees before the Fed’s regulation and responded by cutting back on perks such as rewards programs and free checking to soften the blow to their profits.

‘Too Much’

“This is clearly saying 21 cents may be too much,” said Nancy Bush, an analyst at SNL Financial LC, a bank research firm in Charlottesville, Virginia. “You’ll have to go back to the drawing board and figure out how much a debit-card transaction actually costs and is there going to be some kind of premium paid to that.”

Source: Bloomberg News; Fed’s Debit-Card Swipe-Fee Rules Rejected by U.S. Judge, written by Tom Schoenberg.

Well there you have it. This reminds me of the credit ratings agency story when the government walked away from settlement talks and announced that they would be seeking 10 figures in retribution for the housing debacle. You can read the article I posted on that by clicking the title below:

McGraw Hill (MHP) - Vol Explodes on News of 10-figure Law Suit; S&P Needs to Burn on This One (and so does Moody's)

If you haven'tread that one, I think it's worth your time...

Interestingly, MA is in the same boat as V, but they just released good earnings this morning.  In the face of the news and the earnings, MA is up nearly $9 as of this writing and the volatility is down.

Anyway, let's get into the options analysis of V today starting with the Charts Tab (two-years) below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side we can see the incredibly consistent move up in price. Two years ago this was an $85 stock. Today, even after the drop, it's trading above $180 for more than a 100% return in that time frame. That remarkable up trend and return with equally remarkable low volatility is in great part due to the steadiness of the revenue source (and costs) for V. Transaction fees are easy to predict (until now) and the cost doesn't change that much. It's a beautiful business model, until someone judges it as unfair.

Let's take a look at the one-year IV30™ chart in isolation, below.

We can see that the news today has pushed the implied well into annual high range. In fact, in Mar of this year, the IV30™ hit a low of 14.98%. Whoa... Even now, this is just a 28% vol stock -- not exactly mind blowingly high. That speaks to two things:

(1) The news today is market moving but at this point is not at all catastrophic.
(2) The news today does introduce a new level of uncertainty as reflected by the option market.

Let's look to the Skew Tab, below.

We can see a monotonic vol decrease from the font to the back reflecting less risk in the future than right now. That's interesting considering this news isn't fully digested or complete -- there are more rulings, more pricing, more arguments to be made. I also note the parabolic skew in the front month reflecting both the upside and downside tail risk in the near-term. I dunno... Lower vol in Sep, huh?...

Finally, let's turn to the Options Tab for completeness.

Across the top we can see that Aug is priced to 30.71% while Sep is priced all the way back down to 24.09%. Hmmm....

This is trade analysis, not a recommendation.

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