THESIS: I have had good success with $CF selling put spreads and to a lesser degree call spreads too. However, I learned that shorting $CF especially this low from high is not very smart unless I have conviction that it is headed lower. I don't have any information that would indicate that it is overpriced so for June I am opting for a long trade only. This is a well managed company and is well priced with respect of its earnings power = good value.
THE METHOD: Instead of buying the stock, I chose to sell a put spread so I can limit my dollars at risk especially in this violent environment given the shenanigans in the Eurozone.
THE STRIKES: I usually don't like to go this early for June BUT given that CF has been recently hammered and today's downgrade added another 4% reduction I see an opportunity to open a fairly low strike spread that still gives me another 10%+ protection on the downside.
I chose to sell the June 155/50 put spread for .82. I did this 10x so collected $804.43 after commission.
THE THEORETICAL STATS:
80% chance that this trade will be for maximum profit (remember that this is theoretical not guarantee)
Reward to risk is .2 which is within my comfort zone
Max loss is $4160 (even if stock goes to zero)
IDEAL OUTCOME: CF close above 155 by June expiration (6/15) so I can keep my premium.
As with any trade there are risks but in this case the I am very comfortable with the dollars at risk. I always try to know and manage my risk; I ask 'what will I lose if the crap hit the fan in the worst possible way.' If I know the answer to this and am ok with it then I should be ok.
THIS IS NOT A RECOMMENDATION OF ANY KIND. I ONLY INVEST MONEY I CAN AFFORD TO LOSE.
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