With the markets under pressure, it's time to look for large cap stocks that are at or near 52-week highs. One stock that comes up on the screener is CME Group, a trading marketplace provider.
CME stock was up 1.1% yesterday on higher volume. It sits at a 52-week high and also is above its 21-day exponential, 50-day and 200-day moving averages. If traders were looking to put some money to work, this could be a good potential candidate. The 50-day moving average is at 243.90 and that could provide some support in the event of a pullback.
But traders looking for a more conservative way to play CME stock using options could use a bull put spread.
As a reminder, a bull put spread is a defined risk strategy. Traders always know the worst-case scenario in advance. Further, this type of trade will profit if CME stock trades sideways or higher, and even works sometimes if it trades slightly lower.
How The Bull Put Spread Works
Traders that think CME Group will stay above 250 for the next few months could sell an April 17 bull put spread at 240-250 for around 80 cents. Selling this spread generates roughly $80 in premium with a maximum risk of $920.
If the spread expires worthless that would be an 8.7% return in one month. That also assumes CME stock is above 250 at expiration. Meanwhile, the maximum loss would occur if CME closes below 240 on April 17. In that situation, the premium seller would lose $920 on the trade.
The breakeven point for the trade is 249.20, which is calculated as 250 less the 80 cents option premium per contract. That's also 6.5% below Tuesday's closing price.
It's best to set a stop-loss if the stock breaks back below the 50-day moving average. Another reason would be if the spread increased in value from 80 cents to $1.60. Further, sticking to this stop-loss level will help avoid large losses if the trade goes south.
Ratings For CME Stock
According to Investor's Business Daily's IBD Stock Checkup, CME stock ranks sixth in its group and has a Composite Rating of 96, an EPS Rating of 84 and a Relative Strength Rating of 90.
Please remember that options are risky, and investors can also lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
