Breaking Down a Winning Options Trade on CF Industries Stock

Shortly after our recommendation, CF gapped higher after earnings

by Patrick Martin

Published on Sep 13, 2018 at 12:18 PM

Subscribers to Schaeffer's monthly Option Advisor newsletter doubled their money in a little over a month with the CF Industries Holdings, Inc. (NYSE:CF) November 42.50 call. We're going to take a look back to see why we were initially bullish on CF stock, and how the options trade unfolded.

At the time of our recommendation on Friday, July 27, the fertilizer concern had just bounced off its 60-day moving average and was trading back near 52-week highs. At the same time, CF had just taken out a trendline connecting lower highs since its June peak, meaning a new floor had possibly been established. Longer term, CF was boasting a 57% year-over-year lead, despite the pullback in the previous two months.

However, the sentiment picture for CF was quite bearish. A majority of analysts maintained "hold" or worse ratings on the stock, with only four saying to buy the shares. In other words, there was ample room for upgrades, which could provide more tailwinds for the equity.

Shorts were starting to head for the exit, and an upside move could squeeze the remaining bearish bettors. More specifically, short interest had fallen 21.1% in the two most recent reporting periods, yet short interest still represented almost 6% of CF's total available float. 

CF Industries stock gapped 12.2% higher on Thursday, Aug. 2, after the company's upbeat quarterly earnings report and $500 million share buyback plan. The equity continued to climb from there, boosted by a bevy of bullish brokerage notes from analysts. Plus, short sellers continued to cover, with short interest plunging 25.4% in the Aug. 1 through Sept. 1 reporting periods. CF nabbed a two-year high of $52.90 yesterday, Sept. 12, allowing us to close the trade and lock in a profit of 100%.

Trade Postmortem CF


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