Following in the footsteps of rival MasterCard, Visa announced it is planning to issue an IPO (Initial Public Offering). There are currently three major players in the credit card arena: Visa, MasterCard (MA) and AmericanExpress (AXP), with market shares of 60%, 25%, and 11% respectively.
The amount of purchases with credit cards has exploded, well over $4 trillion each year, and the credit card companies get a piece of each transaction, what a deal. Nice business model, an ever-growing market with recurring revenue and few competitors, swwweeeet.
A potentially lucrative investment strategy could be covered call investing in credit card companies. The credit card covered call investing strategy could potentially be an even more attractive strategy after Visa has its public coming out party.
Using PowerOptions stock options search tool SmartSearchXL to search for covered call investing positions in credit card companies on October 12, 2006 with all options expiring November 17, 2006 (November stock options expiration day), the following positions were found:
|SmartSearchXL covered call search for October 3|
|MA||69.85 (+0.35)||MAKM||06 NOV 65.0 (38)||6.8||9.7||3.1||3.1|
|AXP||57.45 (unch.)||AXPKY||06 NOV 57.5 (38)||1.55||2.7||2.8||2.9|
Two positions were returned with maximum potential returns of about 3%, not a bad return for an investment of only 38 days.
The search results illustrate the reason the covered call investment strategy is considered conservative, as all of the positions have “downside protection” of at least 2.5% (see “Aggressive Strategy for the Conservative Investor” for more information). The downside protection is the percentage that a stock can decline in value before the position will incur a loss. It is simply the option premium divided by the stock price. The MA position is In the Money (ITM); therefore the percent of unchanged in price and the percent if assigned are equal in value.
Out of the money (OTM) calls offer greater upside potential, but require the stock price to appreciate in order to realize the greater returns. OTM calls are often more a play on stock appreciation rather than covered call income.
PowerOptions provides Internet based tools for analyzing stock options with specific search criteria and for finding potentially lucrative option income. For those seeking to execute a covered call investment strategy for their personal portfolios, PowerOptions provides an Internet based search engine for finding potentially lucrative income producing covered call stock options positions.