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While volatility in the financial markets can be a burden for many stocks, it tends to be a boon for CME Group (NASDAQ:CME). Increased volatility tends to lead to more trading. And more trading means more revenue for CME.
CME operates futures and options markets for contracts covering everything from equity indexes and commodities to currencies and interest rates.
While individual investors don’t typically spend as much time trading futures and options contracts, hedge funds and other professional money managers utilize these contracts on a daily basis to both offset risk in their portfolios and to take advantage of moves in the market.
When CME last reported earnings in late October, the company’s Chairman and CEO, Terry Duffy, commented on the increased trading revenue the company had experienced in its “interest rate, equities and metals product lines” as volatility in those markets has been steadily increasing during the latter part of this year.
CME is also enjoying wider margins on the money it makes per transaction. The average rate per contract the company earned increased from $0.749 in Q3 2017 to $0.753 in Q3 2018.
That may seem like a small increase in nominal terms. But it can add up to large increases when multiplied across the millions of transactions the CME makes possible on a daily basis.
We expect to see trading volume picking up for CME through Q4 2018 as the market has become even more volatile than it was during Q3. This should lead to a solid revenue bump for the company.
An Attractive Special Dividend
CME also recently announced a major increase in its Q4 dividend. For the first three quarters of 2018, CME has paid a dividend of $0.70 per share.
In Q4, CME will pay a special dividend of $1.75. Investors are bound to be drawn to the stock as they look for investments that are thriving during this turbulent market time and are generously returning cash to shareholders.
A Bullish Continuation Pattern
Technically, CME has established a solid support level at ~$186.50. We anticipate the stock is setting up to complete a “bullish wedge” continuation pattern.
However, the pattern isn’t complete yet. The stock will need to break above down-trending resistance first. However, we wouldn’t be surprised to see this happen within the next few weeks.
We want to sell naked puts to earn premium from CME while we wait for the stock to break out, as they are a great way to generate income in volatile markets.
CME has an earnings announcement coming up in late January. But it will come after our January puts expire, so we don’t need to be too concerned about that.
To find out which puts we’re selling — and to get access to our full portfolio of income-generating trades — consider signing up for risk-free trial subscription to Strategic Trader today.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.
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