Use Caution Buying CF Industries Call Options At This Level

| About: CF Industries (CF)

As most readers who follow my articles on Seeking Alpha know, CF Industries (NYSE: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
Click to enlarge

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
Click to enlarge

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
Click to enlarge

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
Click to enlarge

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.