Wednesday, April 22, 2009

CME Bull Put Spread

Chicago Mercantile Exchange (CME) reports earnings Thursday morning and has been in a nice uptrend before its recent pullback to the 50 day ema around 225. The stock is trading 228 and change right now and I think has pulled back enough into oversold condition to warrant a nice moderately bullish option trade going into earnings. I want to use a May bull put spread to capture some upside here.

The implied volatility on CME sits around 65% which is a bit lower than the historical vol of the stock which is in the 80s. This usually says the options are underpricing a potential move in the stock. CME usually has pretty good sized moves on earnings as the last 4 quarters have seen moves between 8-12%. I usually prefer to sell options into earnings so lets sell a put spread.

Sell the 230/220 May put spread.

In this trade you sell the 230 puts and buy the 220 puts creating a spread.

Net credit is about $4.50 right now and that is your max gain if CME is above 230 at May exp.

Max loss is $5.50 if the stock finishes May exp. below 220.

Breakeven on this trade sits at 225.50.
You can always cover this short put spread after earnings if you choose to.

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