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CF Industries (NYSE:CF) has neared the $200.00/share price many times over the past year. Each time it has done so, the stock has fallen off this level. Currently, CF Industries is trading at $193.06/share. The 52-week range is $115.34 - $199.39.

  • 52wk high: 199.39
  • 52wk low: 115.34
  • EPS: 21.98
  • PE: 9.00
  • Div Rate: 1.60
  • Yield: 0.828758
  • Market Cap: 12.66 B
  • Volume: 1.56 M

I am anticipating this earnings release, scheduled for May 3, 2012, after the market closes, to be a deciding factor on whether CF industries can truly break out well above $200.00/share, or retreat once again. Either way, I am expecting a large price move after they report.

The trade I will be placing is the "reverse iron condor" spread. The reverse iron condor has four (4) legs. Here is how the trade is placed accurately. (For example purposes, I will only use one contract for each leg):

  • Buy one (1) out-of-the-money put option
  • Sell one (1) out-of-the-money put option (lower strike)
  • Buy one (1) out-of-the-money call option
  • Sell one (1) out-of-the-money call option (higher strike)

It should be noted that it is extremely important that you not overpay for any options trade. This includes only using limit orders and going only mid-point between the bid/ask price. Often, many new options traders will place a market order and overpay.

Here is how I will place this trade with CF industries current price of $193.06/share.

  • Buy ten (10) CF Industries May Week 1 $190.00 put options
  • Sell ten (10) CF Industries May Week 1 $185.00 put options
  • Buy ten (10) CF Industries May Week 1 $195.00 call options
  • Sell ten (10) CF Industries May Week 1 $200.00 call options

Requirements

Cost/Proceeds$2,880.00
Option Requirement$0.00
Total Requirements$2,880.00
Estimated Commission$50.00

Current Price: $193.06

PriceProfit / LossROI %
138.75$2,120.0073.61%
160.10$2,120.0073.61%
182.58$2,120.0073.61%
185.00$2,120.0073.61%
187.12$0.000.00%
190.00($2,880.00)-100.00%
195.00($2,880.00)-100.00%
197.88$0.000.00%
200.00$2,120.0073.61%
205.05$2,120.0073.61%
250.00$2,120.0073.61%

This trade has a high return on investment, and I recommend placing it before the option prices increase due to the increase in implied volatility. The current bid/ask spread on this trade is $2.63 - $3.12. A $7.00 price move (which is required for maximum gain) is very attainable, in my view.

Source: CF Industries Could Break Out Or Break Down - An Earnings Trade For May 3