Is This the Top For the CME Group?

Crude prices have dropped below $50 a barrel for the first time since October 2017, amid data from the EIA showing U.S. crude stockpiles increasing for the tenth consecutive week. All eyes are now on this weekend’s G20 summit, where Russia and Saudi Arabia will likely discuss how to coordinate oil policy. Shielded by a budget surplus and a weak ruble, Vladimir Putin said yesterday current prices are fine for Russia, but Crown Prince Mohammed bin Salman, under pressure over the Khashoggi killing, can’t afford to alienate President Trump and his demand for lower prices.

*Source:  Seeking Alpha

Let’s consider CME Group Inc. (Ticker: CME):

The VantagePoint platform recently indicated downside momentum.

Using the predictive indicators embedded within the VantagePoint platform and its predictive AI technology, we will point out three significant things. We have a bearish crossover indicated by the blue predictive indicator line crossing below the black simple moving average on November 28th.  We can combine that with the VantagePoint propriety neural index indicator moving from the GREEN to the RED position on the same day.  This indicator measures strength and weakness for a 48-hour period, in this case, weakness.  The move to the RED position further makes the case for a potentially bearish scenario. We also have the predicted high and low below yesterday’s actual high and low indicating further weakness.  I want to play the VP bearish indication.

Strategy Discussion

For active traders with a shorter investment time horizon, you can consider a setup utilizing options. Given the market conditions outlined above, taking an active, premium debit approach may be the best path to success.

Because of the reasons given above, the purchase of a debit put spread may be one way to approach this situation.  First, you want to identify your target strike.  To do this, you need three pieces of information:  current underlying price, the date of the options expiration that you want to use and the implied volatility for that expiration.  For CME that yields a target strike of approximately $180.  You can consider purchasing the December 21st regular monthly expiration 180/182.5 put spread for $0.60.  The most you risk is the premium you pay and the most you can gain is the width of the spread less any premium paid. Max risk = $0.60, max reward = $1.90.  The provides you with a reward to risk ratio of 3.17:1

Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.

Position Update

Remember earlier this week we highlighted possible sale of a credit put spread in EBAYWealth Strength IndexAAPL is Extremely Up and trending Up.  We considered the EBAYWealth Strength IndexAAPL is Extremely Up and trending Up December 21st regular monthly expiration 27/28 put spread, selling it for $0.30.  Here’s the chart today:

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The most you can make is the amount of premium collected and the most you can lose is the width of the spread less any premium collected.  Max reward = $0.30, max risk = $0.70.  This means that you are laying odds of 2.33:1.

The platform has performed very well.  The spread’s market today is 0.13/0.18.  You could probably exit this spread for 0.15.  Depending on your own risk profile, that decision would be up to the individual trader.