This article was last updated on June 21
Over the last week or so Visa (V) stock has been on steady run up from about $60 to $90 – until the last 2 days of this week when it lost 7% of its value. I had bought some stock when it was $64 (just after the IPO) and was looking to buy some more based on how the stock performed. It off course performed very well and kept on going up. I kept on waiting for a pullback, but it never came. Finally I got tired of watching the relentless run-up and decided that the uptrend was going to continue – spurred by what I was reading and hearing in the media – and decided to buy some Sep $95 call options. This gives me the right to buy the stock at $95 before the options expire in September. I decided to buy options rather than the actual stock as they provided more upside potential for a smaller investment (each option gives you exposure to 100 shares) – but as I found out the converse is just as true.
I undertook the call options trade on Wednesday this week when the stock was about $90, and I thought that in about five months (the duration of the option) the stock should rise well above $100 thereby making some decent money on the options. But I felt like a true sucker when the share price proceeded to drop over then next two days from about $90 to $83. As I found out option prices magnify both the gains AND losses, so the call option contracts I bought at $8.20, fell to $6.30 – a loss of almost 25% in 2 days!
The options still have a while to run and I do believe in the Visa story over the medium term, so rather than “panic” I will hold on for a bit longer before selling. One of the lessons from all this is not to buy into the market hype, especially using options. The more talked about a stock is in the media; the more chance it has reached its top and is about to have a pullback. Hopefully this story will have a happy ending with the stock getting back to a level where I can break even or even sell the options for a profit. Fingers crossed.