Visa’s Move Into This Continent Could Mean a 176% Gain for Investors
Companies issue press releases quite often. Some of them can be significant for short term traders as this recent example from Visa shows, “Visa (NYSE: V) and the pan-African fintech leader MFS Africa … announced a partnership that will help bridge the gap between the rapidly growing mobile money ecosystem in Africa and the world of online digital payments, significantly expanding Visa’s reach and its ability to open up commerce to the region.
Mobile money wallets are already prevalent across Africa, but without a virtual or physical network credential associated with them, many international online services are unavailable to users.
To help solve this problem, MFS Africa – Africa’s largest digital payments hub, connecting through one API more than 180 million mobile wallets on the continent – will distribute Visa payment credentials across multiple markets in Africa.
This will allow mobile money users connected to the MFS Africa platform to generate an instant Visa virtual card with a 16-digit number and link it to their mobile money accounts to use for remittances and ecommerce transactions.
MFS Africa will also integrate Visa’s real-time1 push payments solution Visa Direct, to provide mobile money users on the MFS Africa platform a fast, convenient and secure way to send and receive money and remittances directly from/into their mobile money wallets via eligible card credentials.
According to the World Bank, remittances to Sub-Saharan Africa are set to increase by over 5.6% between 2019 and 2020, reaching $51 billion. However, the region is still the most expensive in the world to send money to, with an average cost of 9.3 percent2.
“In the past few years, we have been relentlessly focused on creating new digital pathways between mobile money users in Africa. Having reached significant scale, we are now turning our focus to connecting our network to the wider world, to unleash the wealth of opportunity that trade with Africa presents to the global economy,” said Dare Okoudjou, founder and CEO, MFS Africa. ”
We have found in Visa an invaluable partner to support us in the next stage of our expansion. The reach of the Visa network is unparalleled, and we look forward to working with Visa to realise our vision of a world in which no one is limited in what they can achieve when it comes to payments.”
“Africa is adopting a mobile-led, digital payments ecosystem and with Visa looking to accelerate the distribution of payment credentials and expand the acceptance space for digital payments, this partnership is an important one,” said Jack Forestell, Executive Vice President, Chief Product Officer, Visa.
“MFS Africa will help us enable digital payment use cases at scale through their aggregation model.”
The news could push the stock above short term resistance.
The longer term shows that prices have been consolidating for months and could advance quickly after a breakout, if it develops.
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.
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 January 17 options allow a trader to gain exposure to the stock.
A January 17 $190 call option can be bought for about $2.53 and the January 17 $195 call could be sold for about $0.72. This trade would cost $1.81 to open, or $181 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 $181.
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 $3.19 ($195 – $190= $5; $5 – $1.81 = $3.19). This represents $319 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $181 to open this trade.
That is a potential gain of about 176% 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.