Earlier this week, shares of Intercontinental Exchange ICE were upgraded to outperform (essentially a “buy”) from market perform (a “hold” rating) at BMO Capital. The firm established a 12-month price target of $125, allowing for roughly 18% of upside.
The covering analyst noted that changes resulting from FINREG will be “at worst neutral for ICE and more likely opening up some new opportunities.” Earnings estimates for the exchange operator were left unchanged at $5.65 for 2010 and $6.58 for 2011.
While this analyst is optimistic for the stock’s future, the technical picture isn’t as cheerful. The shares are fresh from a six-month low and are staring up at trendline resistance. For these reasons, there are likely investors on either side of the trading fence.
We’ve outlined two option trading strategies below – one for the bulls and one for investors who think the shares could trade in a short-term range. These are meant to serve as examples and do not constitute buy/sell/hold recommendations. Always take your risk/reward parameters into account before entering any new trades. Prices are given as of Wednesday’s close, when ICE was trading at $104.38, down $3.16 on the day.
For more information on option strategies, sign up for the Two Traders, One Strategy Webinar series we host online every Tuesday after the close. The topic for July 27 is collars, a good strategy for traders to learn, especially during earnings season. Check out our entire library of free Webinars at our events page.
Bullish Option Strategy: Cash-Secured Put
Bullish investors might look into the cash-secured put strategy for ICE. The September 95 put can currently be sold for a credit of $2.40. As long as the stock holds above this out-of-the-money strike through expiration on September 17, the investor keeps this credit as profit.
If ICE is trading below the strike at expiration, however, the put seller will likely be assigned and required to buy the shares. Setting aside the necessary cash (or “securing” it with cash) allows this trade to be done without margin. In this case, the investor would allocate $9,260 for every put sold (this is the strike price minus the premium).
The maximum risk in this strategy is unlimited down to zero in the stock or $92.60. The downside breakeven is also $92.60, giving the stock nearly 11% of downside before the short put will enter losing territory.
Neutral Option Strategy: Long Call Butterfly
Those who expect ICE to trade in a narrow range for the next few weeks could consider opening a long call butterfly. An August 95/105/115 call butterfly could be bought for a net debit of $3.33 by simultaneously executing the following trades:
- Buy one August 95 call
- Sell two August 105 calls
- Buy one August 115 call
If ICE shares are trading right at the short strike ($105) when these options expire on August 20, the trader collects the maximum potential profit, which is $6.67, or the difference between the short and long strikes minus the premium paid. Losses are capped at the premium paid ($3.33) and occur if ICE shares are trading below $95 or above $115 when the calls expire. This is a potential return on risk of 200% in under a month.
The downside breakeven for this strategy is $98.33 (the lower-strike long call plus the premium paid) while the upside breakeven is $111.67 (the higher-strike long call minus the premium). At expiration, if ICE shares are trading anywhere between these levels, the butterfly spread will be profitable.
Photo Credit: Kyle May
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