CME Group (CME) is a holding within a 'Core' account and a 'Side' account of the FFJ Portfolio that I intend to hold for the long term. I want, however, to generate additional income from some of my holdings when the underlying fundamentals and short-term earnings expectations do not support the current valuation. In this CME Group options trade review, I explain my thought process for my recent out-of-the-money covered calls options trade.
This options trade is similar to my recent Mastercard, Visa, and Nike out-of-the-money covered call options trades.
CME Group - Options Trade Review - July 16, 2021 Expiry
CME's Q1 results reflect $1.60 in diluted GAAP ($2.14 in Q1 2020) and $1.79 in adjusted EPS ($2.33 in Q1 2020). This document reflects quarterly diluted GAAP EPS dating back to Q1 2019.
If CME generates results similar to those of Q1 in the remaining quarters, we get FY2021 GAAP EPS of $6.40. Just to be conservative I am arbitrarily increasing this value to $6.70.
CME is currently trading at ~$218 so using $6.70 I arrive at a forward diluted GAAP PE of ~32.54.
In comparison, CME's FY2011 - FY2020 diluted GAAP EPS is $5.43, $2.70, $2.92, $3.35, $3.69, $4.53, $11.94, $5.71, $5.91, and $5.87. Its diluted PE over the same timeframe is 12.92, 18.77, 27.53, 29.45, 24.22, 26.89, 33.12, 14.20, 35.28, and 30.34.
The FY2021 adjusted diluted EPS projections from 21 brokers is a mean and low/high range of $6.75 and $6.18 - $7.55. Using the current ~$218 share price and the mean $6.75 projection, the forward adjusted diluted PE is ~32.3.
The FY2022 adjusted diluted EPS projections from 21 brokers is a mean and low/high range of $7.34 and $6.66 - $8.05. If I use the current share price and the mean $7.34, the forward adjusted diluted PE is ~29.7. This is a very wide range of projections. In addition, the projections are for the next fiscal year; I place much less reliance on this guidance for my immediate purposes.
Yesterday, I wrote 3 $230 CME July 16, 2021 out-of-the-money covered call options contracts and collected $1.70/share or $170/contract. This is $510 for 3 contracts before the nominal commission.
The duration of these contracts is 49 days and the variance between the current ~$218 share price and $230 strike price gives me a $12 buffer. I also see that CME's 52 week high is ~$225. I am cautiously optimistic CME's share price will not set a new high between now and the July 16, 2021 expiry of the options contracts.
CME Group - Options Trade Review - Final Thoughts
This brief CME Group options trade review explains my rationale for my out-of-the-money covered call options trade.
I could generate more premium income by going out further on the calendar or by selecting a lower strike price. However, I purposely select a short duration because the time value component of the option premium decays faster with short-term contracts; time decay works in the favour of option sellers.
In addition, my strategy is merely to skim additional income. I want to minimize the risk of being 'called away' or having to close my position at a loss. I, therefore, select a strike price that is well above the current share price.
Stay safe. Stay focused.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long CME.
Disclaimer: I do not know your individual circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
