Options Traders Could Be Taking the Wrong Approach on this Fertilizer Stock

CF Industries stock is entering one of its worst months

Sep 1, 2017 at 2:18 PM
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After peaking near $70 back in July 2015, shares of CF Industries Holdings, Inc. (NYSE:CF) quickly retreated in dramatic fashion, losing more than half their value over the next year. Since then, the stock has mostly been trading sideways, last seen at $29.95. Looking closer at CF's chart, it's been bouncing between a number of key technical levels, namely Fibonacci retracements of its 2017 high to its 2017 low. Currently, CF Industries is trying to overcome a 38.2% Fibonacci retracement of these levels, which is just below the round $30 level -- exactly the site of today's intraday peak. 

cf stock

What makes the equity's current situation so much less appealing is the fact that it's entering one of its most bearish times of the year. Specifically, CF stock has averaged a loss of 4.1% for September during its lifetime. At the same time, this would put the shares in the $28.50-$28.60 region, which has been their floor during the past three weeks. But that doesn't seem to justify how bullish options traders have been. 

Specifically, more than 3,000 calls were bought to open during the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), compared to just 317 puts. The resulting 10-day call/put volume ratio of 9.56 ranks just 5 percentage points from an annual high, signaling a stronger-than-normal appetite for bullish options trades. 

Looking closer, September 29 and October 32.50 calls saw the largest increases in open interest during the past two weeks, followed by the weekly 9/1 32.50-strike call. This latter contract -- which expires at the close today -- has seen heavy buy-to-open activity, meaning these traders were hoping for CF shares to topple the $32.50 level by today's close, which seems very unlikely at this point. It's also worth noting that this price point lines up perfectly with a 61.8% Fibonacci retracement of the security's 2017 high and low. 

But short interest is also elevated on this stock, with 14.7% of its float sold short. Going by average daily volumes, this equates to 6.5 days' worth of buying power. As such, it's possible some of the recent call buying could be attributed to short sellers using options to hedge.

But no matter if you're bearish or bullish on CF Industries, it's a great time to buy short-term options. That is, the equity's Schaeffer's Volatility Index (SVI) of 28% sits only 3 percentage points from a 12-month low. Said differently, the options market is pricing in unusually low volatility expectations right now for near-term contracts. 

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