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.
CME Group - Options Trade Review - July 16, 2021 Expiry
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.
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I wish you much success on your journey to financial freedom!
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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.