As most readers who follow my articles on Seeking Alpha know, CF Industries (CF) has always been one of my favorite stocks to trade using options. I use this stock with my daily options trading strategy and absolutely love the volatility it brings to the table. You can read more about this strategy in my article "A Daily Options Trading Strategy For High Flying Stocks."
I am a big proponent of following trends within a given security. When I see a pattern develop time and time again, I definitely take notice. CF Industries is currently showing a pattern of falling in share price almost immediately once the stock reaches the $200.00/share level, which is right near where the stock was as of Tuesday's market close.
The 52-week range for CF Industries is $115.34-$.203.32. Based on recent past history, the stock should retreat to the $160.00-$170.00/share level, as this analysis will show. Here we can see that CF Industries eclipsed $200.00/share, followed by a fast sell-off:
April 27, 2012, to May 3, 2012
|May 3, 2012||201.01||203.32||194.80||197.48||2,339,504|
|May 2, 2012||197.51||201.24||196.24||200.13||2,378,876|
|May 1, 2012||193.08||196.87||190.86||195.21||1,604,706|
|Apr 30, 2012||197.79||198.68||192.73||193.06||1,560,998|
|Apr 27, 2012||193.83||199.39||192.88||197.97||1,843,086|
May 4, 2012, to May 14, 2012
|May 14, 2012||168.98||169.62||165.70||165.78||1,948,411|
|May 11, 2012||170.70||174.45||168.10||172.18||1,639,700|
|May 10, 2012||177.57||177.73||171.23||172.17||2,084,088|
|May 9, 2012||175.29||179.53||173.50||175.19||2,397,287|
|May 8, 2012||182.29||183.26||177.47||182.90||2,124,714|
|May 7, 2012||180.81||187.36||180.33||183.91||1,907,210|
|May 4, 2012||194.24||194.92||181.61||183.91||3,837,479|
February 27, 2012, to March 1, 2012
|Mar 1, 2012||189.32||189.71||184.90||189.23||1,788,437|
|Feb 29, 2012||192.69||193.46||184.75||186.00||2,709,627|
|Feb 28, 2012||189.51||195.48||188.88||191.56||2,585,999|
|Feb 27, 2012||182.85||189.79||181.25||189.13||1,939,991|
Once again, after reaching a high of $195.48/share on Feb. 28, 2012, CF Industries fell precipitously from this level:
March 2, 2012, to March 7, 2012
|Mar 7, 2012||172.04||177.60||170.68||175.84||2,493,702|
|Mar 6, 2012||174.20||174.75||168.35||168.97||3,299,914|
|Mar 5, 2012||184.70||185.80||176.20||177.98||3,133,414|
|Mar 2, 2012||188.52||192.00||186.82||188.25||1,513,237|
It is important to note that I am not looking at this trade as a long-term play. Instead, I am expecting a relatively quick drop from its current level of $200.00/share. I will be purchasing August 2012 $195.00 strike put options this week. I hope to be out of this trade with at least a 50% profit on the put options price within a couple of weeks.
While CF Industries is a great company with excellent financials, I will continue to buy call options on this stock when it dips to the $150.00-$160.00/share level. But I will also continue to by put options until the stock shows it can maintain a share price above $200.00 share.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in CF over the next 72 hours.