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A Sharp Drop for Visa Inc Doesn't Keep Near-Term Bulls at Bay

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Call buyers expect Visa to retake the $190 level.

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Shares of Visa Inc (NYSE:V) took the opposite path of sector peer MasterCard Inc (NYSE:MA) yesterday by tumbling 7.5%, after a federal judge invalidated a 2011 Fed rule regarding merchant charges for debit-card transactions -- a move that could force the central bank to reduce these fees. Nevertheless, bullish traders were undeterred, as approximately 57,000 calls switched hands by the closing bell, which was almost eight times the equity's average single-session call volume. At the other end of the options spectrum, around 36,000 puts were traded.

At the helm was the August 190 call, where nearly 7,700 contracts crossed the tape -- a large portion of them at the ask price, pointing to buyer-driven activity. These deep out-of-the-money calls were exchanged at a volume-weighted average price (VWAP) of $1.69. Meanwhile, open interest surged at this strike overnight, confirming the initiation of new positions. In other words, traders are betting on V to rise north of breakeven at $191.69 (strike price plus the VWAP) by the close on Aug. 16, which represents front-month expiration. This denotes a jump of 9.1% from the equity's current perch at $175.64.

Also garnering notable attention was the weekly 8/2 190-strike call, which saw close to 6,900 contracts trade at a VWAP of $0.54. This strike saw an overnight rise in open interest, and the majority of the calls crossed at the ask -- again signaling the creation of fresh bullish bets. In this case, however, the speculators will profit if V surmounts $190.54 (strike plus VWAP) by this Friday's close, when these weekly options expire. At last check, the delta for these calls was docked at just 0.035, meaning they have less than a 4% chance of finishing in the money.

This predilection for short-term calls over puts is more of the same for the credit card behemoth. Schaeffer's put/call open interest ratio (SOIR) for V checks in at 0.69, indicating calls outstrip puts among options with a shelf-life of three months or less. In fact, this ratio ranks lower than all similar readings taken within the last 12 months, meaning near-term options players are more call-heavy toward the stock now than at any other time during the past year.

On the technical front, Visa sports a year-to-date gain of roughly 16% -- despite yesterday's drop -- and a 52-week advance of around 37%. However, the stock is now in danger of finishing the week below its 20-week moving average for the first time since June 2012. Still, even if the stock fails to conquer the $190 mark, the most yesterday's bulls stand to lose is the initial premium paid for their long calls.

This article by Terri Stridsberg was originally published on Schaeffer's Investment Research.

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