One of the most important lessons I learned early in my trading career years ago was by an instructor at the Chicago Board Options Exchange (CBOE). He told me that to be successful trading stocks or options, you must follow only a select number and stocks and know how they move on a daily basis. In my beginning days of trading, I was all over the place with my trades, from stock to stock, trying to find the one that would hit a homerun for me. Sure, I did hit on some very successful trades, but I also struck out quite a lot too.
This brings me to a company that is one of the best for day trading and options trading if you follow it on a daily basis and do not get greedy by its rapid price fluctuations: CF Industries (NYSE:CF). CF Industries is a company that manufactures and distributes nitrogen and phosphate fertilizer products, serving agricultural and industrial customers worldwide. It operates in two segments, Nitrogen and Phosphate. The Nitrogen segment principally offers ammonia, urea, urea ammonium nitrate solution, ammonium nitrate, diesel exhaust fluid, and aqua ammonia. The Phosphate segment primarily offers diammonium phosphate and monoammonium phosphate. It is based in Deerfield, IL. The price of CF Indsutries, as of Wednesday's close, was $144.98/share. It has a 52-week range of $92.41 - $192.70. I will outline what technical tools I use on my daily charts and what signals alert me to make the trade. I prefer to use options trading on CF Industries by buying ten (10) in-the-money calls or even slighty out-of-the-money calls with at least one month until expiration. I use the one month time premium as a security precaution just in case an unforeseen event happens. It also never hurts to have extra time when dealing with options to begin with. While you may pay more for time premium, it is worth it. I always set a sell order immediately after placing my trade. Liquidity is always important when dealing with options (especially on the sell-side of the trade) so that the bid/ask price isn't so wide. I am comfortable with CF's option liquidity. Taking a closer look at how CF Industries trades, here is a chart from Yahoo! Finance on the on the daily highs and lows:
|Sep 28, 2011||151.72||153.34||144.46||144.98||2,460,600||144.98|
|Sep 27, 2011||154.46||159.60||152.50||154.95||3,190,600||154.95|
|Sep 26, 2011||147.35||152.57||138.09||152.09||3,513,300||152.09|
|Sep 23, 2011||144.43||148.95||141.82||145.69||2,879,900||145.69|
|Sep 22, 2011||146.84||150.29||138.52||146.89||4,488,400||146.89|
|Sep 21, 2011||163.60||167.02||152.92||152.94||3,468,300||152.94|
|Sep 20, 2011||175.95||175.95||162.74||163.67||3,903,100||163.67|
|Sep 19, 2011||173.03||176.47||171.27||175.08||1,683,700||175.08|
|Sep 16, 2011||175.83||176.88||172.54||175.15||1,904,500||175.15|
|Sep 15, 2011||180.22||180.95||173.65||175.38||2,157,800||175.38|
As you can see from above, there are swings in this stock that are simply great for getting in and out of trades daily. This chart isn't just an aberration of only ten (10) days of trading. This is somewhat the norm.
I'm not going to say that CF Indusrties is not well known, because it is. However, it is a bit more under the radar than many other of the agricultural and fertilizer stocks such as Potash (POT), Mosaic (MOS), and Monsanto (MON). CF Industries (CF) market capitalization is much smaller than those mentioned above, and is around $10.4 billion a sof this writing.
So here's how I like to trade CF Industries using call options: Before trading begins I set up my daily streaming real-time charts. I like to have the time interval set at two (2) minutes. You can choose whatever you are comfortable using, however. The first technical indicator I apply is Bollinger Bands on the chart itself, which I use with 12,2,2 as my parameters, i.e. (12) as the Simple Moving Average (SMA) and Standard Deviation, (2) as the standard deviation of the top band, and (2) as the standard deviation of the bottom band. As a personal preference, I will not begin to even consider making a trade until I see the current price action move below the bottom band, but this is only one of the indicators needed out of five (5) total.
After setting up the Bollinger Bands and their settings, I put beneath these a series of four (4) indicators that really give me the confirmation needed to place the trade. I like to have all of these separate from one another so I can view the whole chart and indicators independently of one another. Having a bunch of lines moving all over the place on a chart will only confuse things for you. Viewing these indicators in this set-up makes it simple and very effective. Trust me on that. First up is applying the Relative Strength Index (RSI) with a length of twelve (12). The RSI is an indicator that shows when a stock is at overbought and oversold levels. It has a range of 0-100. A reading on the RSI of 70 indicates overbought levels, while 30 is considered oversold. Some traders like to go even below the standard 30 level for a buy confirmation, but it is ultimately the trader's choice.
Below the RSI, I apply the Intraday Momentum Index (IMI). The IMI is invaluable as far as I'm concerned for an options trader who gets in-and-out of positions quickly. The Intraday Momentum Index is similar to reading the Relative Strength Index, in that both of them have a range of 0-100. Again, 70 indicates overbought, while 30 is considered oversold. I also use the range of twelve (12) to correlate with the RSI. Again, it is the trader's preference as to what length works and what he or she likes to use. The Intraday Momentum Index is a very powerful technical indicator to use for any type of trader.
The Money Flow Index (MFI) follows the IMI as the next indicator. The MFI is a momentum indicator that is used to determine the conviction in a current trend by analyzing the price and volume of a given security. The MFI is used as a measure of the strength of money going in and out of a security and can be used to predict a trend reversal. The MFI is range-bound between 0 and 100 (like the RSI and IMI) and is interpreted in a similar fashion as the RSI and IMI. The fundamental difference is that the MFI also accounts for volume, whereas the RSI only incorporates price. It is also different in the fact that instead of the number thirty (30) indicating oversold levels, the Money Flow Index uses twenty (20) as oversold and eighty (80) as Overbought.
Finally, we have the Full Stochastic Oscillator (FSO) as our last indicator. Used by many Forex traders, I find the FSO tremendously helpful in my trades as another indicator that confirms what the previous four have already done. Combining all of these together really validates when it is an opportune time to buy. The FSO is a combination of the Slow Stochastic and the Fast Stochastic and is more advanced and more flexible than the Fast and Slow Stochastic and can even be used to generate them. Readings above 80 act as an overbought signal while readings below 20 act an oversold signal. The parameters I prefer to use are (12,6,6) for daily trading.
I have been trading CF Industries for a long time and I absolutely love the indicators I have provided for you here. Of course, I have mentioned the bullish side of trades that I use, but it can just as easily be used for a bearish strategy. It should be worth noting that CF had its earnings swell nearly fivefold in the second quarter and raised the dividend.
Proceed with caution if you do plan to use puts on CF. One of the many reasons that I place a sell order immediately after placing the trade is that I want to take out all of the emotion out of the trade. Often, with the ten (10) contracts I am holding, I am in-and-out of a trade very quickly. I usually set the sell order anywhere from $0.60- $1.00 above what I paid for it. I monitor it intently and will use a trailing stop order if I really see it making a nice move in my desired direction. However, I also have no worry if the trade doesn't work out that day because I have given plenty of time to my options for it to work out by placing the order at least a month from expiration.
As I mentioned, it is really effective when you are dealing with a company that has stock with liquidity in the options and large daily price swings. Netflix (NASDAQ:NFLX), Apple (NASDAQ:AAPL), Baidu (NASDAQ:BIDU), and Google (NASDAQ:GOOG) also work very well with this method. As always, please use limit orders and all-or-none orders when placing your trades.
Disclosure: I am long CF. I trade options (mostly call options) on (CF)on a daily basis.