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This Small Deal Could Be a Big Deal for Investors in V

This Small Deal Could Be a Big Deal for Investors in V

Sometimes investors fail to consider large cap stocks. They may understand there is value in a large cap stock but share prices are sometimes high. Other times they worry there isn’t sufficient potential for a large gain. A recent small deal for a large company shows how small traders can look at large caps.

Business Wire recently reported, Visa (NYSE:V) announced it has signed a definitive agreement to acquire Verifi, a leader in technology solutions that reduce chargebacks.

The combination of Verifi’s best-in-class Vpute resolution tools with Visa’s suite of risk and fraud management solutions will give buyers and sellers intelligent, data-driven tools that foster collaboration, build trust, and improve the overall customer experience.

With the addition of Verifi, Visa will extend its chargeback and Vpute resolution capabilities to support a broad range of payments brands and partners across the ecosystem.

Today’s standard process by which transaction Vputes are resolved – called a chargeback – provides information about a transaction through various offline channels and platforms.

Verifi’s industry leading technology solutions save valuable time and resources by connecting all parties in the Vpute management process in near real-time to resolve Vputes before they become a chargeback. Verifi serves more than 25,000 accounts around the world.

Visa will integrate Verifi’s enhanced chargeback tools with Visa’s risk management services, including those delivered by CardinalCommerce and CyberSource.

Buyers, sellers, issuers and acquirers will benefit from greater automation in Verifi, near real-time communication and data-driven insights through every stage of the customer journey.

“As the way people pay and get paid continues to evolve, the way buyers and sellers communicate to resolve transaction Vputes must also keep up with this rapid pace of commerce.

The addition of Verifi’s technology to Visa’s risk management solutions will introduce greater collaboration and insights to help resolve Vputes quickly,” said Mary Kay Bowman, global head of seller solutions, Visa.

“Facilitating trust and transparency across the buying experience is core to Visa’s brand promise and Verifi’s technology and expertise will extend these capabilities to more partners across the payments ecosystem.”

“Verifi has been a leader and trusted partner for the payments industry for years. We pride ourselves in delivering technology and tools that improve communication and insights through the Vpute management process to prevent unwanted chargebacks,” said Matthew Katz, CEO, Verifi.

“We are thrilled to be joining forces with Visa to scale and expand this offering and further modernize the Vpute management process.”

The news had little impact on the stock but that is to be expected for such a large company.

V daily chart

However, the stock is in an uptrend and that sets up a potential trade.

V weekly chart

A Trade for Short Term Bulls

As with the ownership of any stock, buying V could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

bull call spread

Source: The Options Industry Council

Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

A Specific Trade for V

Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

For V, the July 19 options allow a trader to gain exposure to the stock.

A July 19 $175 call option can be bought for about $1.85 and the July 19 $177.50 call could be sold for about $0.87. This trade would cost $0.98 to open, or $98 since each contract covers 100 shares of stock.

The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

In this trade, the maximum loss would be equal to the amount spent to open the trade, or $98.

The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

For this trade in V the maximum gain is $1.52 ($177.50 – $175= $2.50; $2.50 – $0.98 = $1.52). This represents $152 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $98 to open this trade.

That is a potential gain of about 155% in V, based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.