Chicago Bridge & Iron Company N.V. (NYSE:CBI) shares have been rescued from the brink of despair. Credit for the abrupt turnabout lies with a favorable court ruling by the Delaware Supreme Court. CBI stock is rocketing higher on the news, destroying any and all short sellers in its wake.
Over the past two days, CBI is up 56%. With a heap of uncertainty now cleared up, it’s time for a fresh look at the stock’s price chart to see how to trade it moving forward.
For all its fury, this raging rally has only recovered about two-thirds of what was lost since May’s price gap. Much work remains before the nightmare of the past two months can be written off. In early-morning trading Wednesday, CBI stock is struggling with overhead resistance. Both the descending 50-day moving average and the 61.8% Fibonacci retracement level are halting the stock’s advance.
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Though, to be fair, the rocket-ship rise had to run out of fuel somewhere. A 56% two-day jump is about as good as it gets. At this point, some backing and filling may be in order.
What CBI might need most is time. Time to digest its rapid-fire gains and to turn its downtrend, which has been well-entrenched.
The Trade on CBI Stock
Chasing shares to the long side here is far from prudent. Too many gains have been had in a short period, and too much resistance looms overhead. If anything, the best play here is to dip your toes in on the short side, to bet on a pause or pullback following such a large run.
But, rather than short the stock, let’s use the options market to build a trade boasting a high probability of success. Not surprisingly the excessive volatility in Chicago Bridge & Iron has lifted demand for its options. The implied volatility rank currently stands at 97%.
If you’re comfortable betting CBI will remain below $27.50 for the next few weeks, sell the Aug $27.50/$30 bear call spread for 30 cents or better.
The reward is limited to the initial 30 cents. The risk is limited to $2.20 and will be forfeited if the stock rallies above $30 by expiration.
To minimize the damage, I suggest exiting if CBI stock lifts to $27.50
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
