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New Trade – SELL OCT14 CALLS on CLF

Another bearish trade I see coming was against Cliffs Natural Resources Inc. (CLF). The stock suffered a severe decline in recent months with a few relieves in March 2014 and end of June 2014.

Review the chart below:

CLF

Take a look at point “A” where the stock had the second last relief from a downtrend. The point “B” shows a relief we are experiencing today, but it seems like that the relief may be over, see “C”.

The squeeze trend is turning negative “D” and the wave is very negative “E” which all together makes 70% chance that this rally will fail.

It can only be a temporary decline, creating the first higher low on its way further up, but this theory is not supported by the indicators.

Therefore I decided to take a trade speculating that from now this stock will continue lower and I sold a few naked calls.

Trade Details

STO -5 OCT14 17 call @ $0.66

With this I collected $330 in premium and now I have to wait until October 17 and hope that my judgement was correct.

 

Max Profit $330 When selling calls, the hope is that they will expire worthless, so the max profit is equal to your execution price. Max profit occurs if CLF is below 17 on expiration day, which is October 17 for this option.
Max Loss Infinity In theory, CLF could keep going up, and since you are giving someone else the right to buy it at 17, your max loss is unlimited. However, remember that this trade has a time limit on it. On expiration day, October 17 for this option, if CLF is above 17 you will either need to buy back (cover) the call or you will be assigned -500 shares of CLF as a short position, with an entry of 17.

 
 

 
 

Since I opened the trade, the stock continued selling off pretty hard. Let’s see how it will act in the next couple of months.

If the trade turns against me, I will either roll the calls higher or take the loss.

Happy Trading!





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