Playing CME Group – The House Rarely Loses
By Paul Price of Market Shadows
Global leader CME Group (CME), the world’s largest clearing house for trading futures and options on futures, is trading at a modest valuation, and we're going to add it to our virtual value (stock) portfolio and our virtual put-selling portfolio.
The stock has declined from 2014’s peak of $84.69 to $69.39 presenting us with a relative bargain on this low-debt, decent yielding (2.71%) market leader.
We bought 60 shares outright for the Virtual Value Portfolio using $4,136 from our cash reserves.
In the Market Shadows Virtual Put Writing Portfolio, we sold 2 contracts each of the CME Jan. 2016, $55 and $57.50 strike price puts. We received $4.21 per share on the $55 put and $5.10 per share for the $57.50 strike put.
For the sold puts, our best case scenario only requires that CME remain above their respective strike prices. If that happens, we’ll keep 100% of the put premiums received.
In a worst-case scenario we will be forced to buy 200 shares at a net cost of $50.79 ($55 strike – $4.21 put premium) and 200 shares at a net price of $52.40 ($57.50 – $5.10).
Our average net basis of $51.60 (if both strikes get exercised) would be about as low as CME has traded since the very start of 2013.
That looks mighty attractive as CME Group is expected to post its all-time best results in both 2014 and 2015. During 2007’s market heyday, CME hit a pinnacle of $142.90 on earnings per share that were not too different from its trailing 12-month figure of $3.04 per share (through Mar. 31, 2014).
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