I bought into the market hype for Visa and got burnt!

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.

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