How Momentum Traders Scored Big With CME Group Call Options

A post-election rally in financial shares helped CME Group March 100 calls bank a more than 200% profit

Mar 24, 2017 at 9:33 AM
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Subscribers to Schaeffer's PowerTrend service more than tripled their money, after we suggested that options traders buy CME Group Inc (NASDAQ:CME) March 100 calls in early November. Here's a quick rundown of what initially drew us to CME shares, and how the bullish options trade was eventually closed out for a more than 200% profit.

We initially recommended the CME March 100 calls to our subscribers in early November, when the stock was trading around $105.67. CME shares had been outperforming the broader stock market, and had recently staged a big rally off their 10% year-to-date breakeven mark. In addition, the stock had found double-barreled support from its 12-month moving average and the round century mark.

Despite this impressive technical backdrop, sentiment toward the shares tilted toward the skeptical side. Among the brokerage bunch, five of 10 analysts maintained a "hold" or worse rating toward CME -- a positive setup for a bullish contrarian trader, though, as potential upgrades could draw a fresh batch of buyers to the table.

There was not a lot of enthusiasm among options traders, either, per CME's Schaeffer's put/call open interest ratio (SOIR) of 1.02. This indicated to us that sideline money was available to help drive the shares higher. Additionally, CME's options were priced right, considering the stock's Schaeffer's Volatility Index (SVI) was perched in the low 17th percentile of its annual range. In other words, the options were relatively cheap to leverage a move to the anticipated $115-$120 region by March.

After subscribers received their trade recommendation on Tuesday, Nov. 8, the shares shot higher along with the broader stock market on Nov. 9, as doubt surrounding the U.S. presidential election faded -- a move we anticipated for CME stock. Specifically, no matter who won the election, volume would pick up on CME and other exchanges as uncertainty was lifted, and traders could either unwind positions or place new bets on assets such as interest rate and energy products, e-mini S&P futures, and currency products. In other words, a volume surge would lead to anticipation of a strong fourth-quarter earnings and beyond. Shares of the exchange operator then proceeded to make a series of higher highs, as the financial sector surged amid the "Trump rally" on hopes the new administration would lower taxes and regulations for the industry.

In fact, we closed half of the position on Dec. 7, when CME was trading at $121.28, for a profit of 200%. The other half of the bullish position was closed last Friday, when CME Group Inc (NASDAQ:CME) was lingering near $124.40, for a profit of 229%.

CME stock price chart

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