John: CME Group (CME) was getting hammered with the rest of the financials which on the one hand is unfair because its not a bank, but on the other hand represents a tremendous trading opportunity. The reality is, the CME thrives in an environment like this. Chaos creates volatility -- massive volatility -- and that creates record trading volume across their various contracts. Although the price is reflective of what's happening in the market, this is the best thing that could happen for their earnings and with this type of action their earnings are going to be strong.
Let's review the T3/OP video with Jill and Scott to understand more on the fundamentals of the space and CME technicals before we get into into the options play.
Last August CME hit a low of 234.50 before rocketing up to $328.00. As of Wednesday's close this stock is trading at $239.21. I'm looking to buy September series $250.00 calls at these levels. I'm hoping we push through that August low and do a stop run, giving me a chance to get a better price on my call options -- but I'm fine with starting to nibble on them at current levels.
Now over to Jared for his way to play the positive bias...
Jared: One theme this week has been the record trading activity on U.S. exchanges. TD Ameritrade (AMTD) reported that trading volumes on Monday were the largest in its history, with new money coming into trading accounts from bottom-picking investors. (WSJ) Trading volume at CBOE reached a new all-time high for the second day in a row on Monday (CBOE), and CME reported a new all-time high in trading volume on Tuesday, with nearly 26 million contracts traded. (Marketwatch). CME noted that all-time product highs were reached for gold futures and options. In short, investors want to buy (and sell, and buy and sell again) what the exchanges are offering.
CME has performed well in recent months relative to its peers. Since April, the stock is down around 16%, while issues like NASDAQ OMX Group (NDAQ) and NYSE Euronext (NYX) have declined by 24% and 28%, respectively. CBOE Holdings (CBOE) has fared marginally better, but with greater return volatility. Figure 1 shows the performance of these names in percentage terms.
On the volatility front, CME options are priced at levels not seen since 2009. At-the-money options expiring in September have premiums implying an annualized volatility of 50%, versus one-month stock volatility at about the same level. However, if we look further out of the money, the 210 put options trading at 59% IV make attractive sale candidates, and we can cover that sale with the 200 puts. The thesis here is that, once the markets quiet down somewhat, investors will recognize the value in CME.
Trades: Buy to open CME September 200 puts for $3.20 and sell to open CME September 210 puts for $4.40.
At the time of publication, Jill Malandrino, John Carter and Jared Woodard held no positions in the stocks or issues mentioned.
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