Credit Spread – CF Industries Holdings (CF)

As bearishness takes hold, it's a good time to be selling premium

   

The market sure has taken a severely bearish turn over the last couple of days. Even the most bullish traders have to wonder what will happen next. In a market like this, it nice to have an option strategy that leaves some room for movement either bearish or bullish. Here is such a trade idea you might want to consider.

CF Industries Holdings (CF) Put Credit Spread

The trade: Sell the July 165/170 Put Credit Spread (selling the July 170 put and buying the July 165 put) for 50 cents or better.

The strategy: The maximum potential profit for this trade is 50 cents if CF is trading above $170 at July expiration. The maximum loss is $4.50 ($5 – 50 cents) if CF is trading below $165 at July expiration.  Breakeven is $169.50 at expiration based on a credit of $0.50.

6 20 13 CFchart 300x122 Credit Spread – CF Industries Holdings (CF)
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The rationale:
CF Industries manufactures and distributes nitrogen and phosphate fertilizer worldwide. The company recently had trouble keeping up with the demand for its nitrogen-based fertilizer as farmers were planting corn at a record level. In fact it was supposed to be the biggest crop since 1936. With about 80% of its revenue derived from nitrogen fertilizers, the company is well positioned to take advantage of the growing demand.

Taking a look at the chart: the stock has been in a channel trading between $182 and $197 for about two months. With the recent decline in the market, CF might be challenging its $182 support area (prior pivot lows). Back in April of this year, the stock did drop below that area but that area was not considered support at the time and eventually reversed right above $170. Even though this area cannot be classified as major support, it is still a pivot level in which the stock might have a difficult time trading below if it drops that far. Of course there is still plenty of upside potential for the stock so that might be a moot point anyway. In addition, implied volatility is higher than historical levels which makes it a good time to be a seller of premium.

 

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