Despite a market that stinks, fertilizer stocks stand out as leaders for the year. Here's a bullish option strategy on CF stock for those that don't think the move is over.
The Smell Of Success
CF Industries is unlike most stocks of the year. While market indexes reached bear market territory, CF stock sported a year-to-date gain of over 50%. That's earned it a spot on both Leaderboard and SwingTrader.
According to the IBD Stock Checkup, CF stock ranks No. 1 in its group and it's no wonder. It boasts the best possible Composite Rating of 99, an EPS Rating of 99 and a Relative Strength Rating of 99.
Its pullback at the end of April was sharp. Even so, it was mostly contained by its 50-day moving average line.
Investors that think CF stock will stay above the 21-day moving average for the next week or two, could look at a short-term bull put spread.
Bull Put Spread On CF Stock
To execute a bull put spread an investor sells an out-of-the-money put and then buys a further out-of-the-money put.
Selling the June 3 put with a strike price of 100 and buying the 95 put creates a bull put spread.
This spread traded yesterday for around 90 cents. That means, a trader selling this spread receives $90 in option premium to their account. This is also the maximum profit you achieve if CF stock closes above 100 at expiration. In that case, the options expire worthless and you keep the premium.
The maximum loss comes out to $410. That's calculated by taking the width of the strikes and subtracting the premium received and multiplying by 100 shares per contract. If CF stock closes below 95 on the expiration date, the trade loses the full amount of $410.
Though it might seem like very little return, that's a 22% return on risk between now and June 3 if CF stock remains above 100.
Managing The Trade
The break-even point for the bull put spread is 99.10, which is simply the higher 100 strike less the 90 cents in option premium per contract.
What about exposure? This bull put spread trade on CF stock has a delta of 11, which means it's a similar exposure to owning 11 shares of CF stock. Although, this exposure will change over time as the stock price moves.
In terms of a stop loss, if the spread doubles from 90 cents to $1.80, I would consider closing early for a loss. You could also use the price of CF stock itself and close the position if it drops below 100.
With earnings due in early August, this trade shouldn't have earnings risk unless CF stock gives early guidance.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
