Where Have All the Traders Gone?

by John Kmiecik | November 20, 2011 9:30 am

One bit of fallout of the MF Global disaster is that there are a lot of traders, both professional and retail, who haven’t been able to trade. That puts a dent in trading volume at the CME Group (NASDAQ:CME[1]).

Volume is how they make their money, and its next earnings announcement (due in late January or early February) may disappoint. In the short term, the stock has a good chance of trading lower as other traders anticipate lower earnings in regard to volume.

So, when you’re about to establish an options trade on a name like CME, how do you pick the right strike price?

Support and resistance areas can be very useful tools in an options trader’s arsenal. They can be used to identify ideal points to enter or exit positions. They can also keep you from entering a position early before there is confirmation of a trend.

Technically, CME has been in a downtrend and, on Friday, the stock rallied up to a resistance level in the $250 area. If the stock can’t get over resistance, it might be “Sayonara, Baby!”

The $240 area looks like a nice target, considering there is support at that point. This trade idea can be held longer term, but there might be a good chance for quick profits in the short term.

With CME trading here at $248.88, you can buy the CME Dec 240 Puts for $9 or less.

The long put strategy is pretty straightforward. The trade profits when the stock falls and the put premium increases as the CME option moves farther and farther into-the-money.

Maximum profit is almost unlimited only because CME can only fall to $0 (which is highly unlikely), and the maximum loss is $9 if CME finishes at or above $240 at December expiration.

Endnotes:
  1. CME: http://studio-5.financialcontent.com/investplace/quote?Symbol=CME

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