My most profitable years as a trader were when markets were behaving oddly:
The dot-com rally in the 1990s... its subsequent crash in 2000... the housing and energy bubble of the mid-2000s... its subsequent crash in 2008... etc.
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But it wasn't just my profits that increased; the cost to lease a seat at the exchange I traded at was also at record highs during the late 2000s, when trading volume was near record territory.
If you've played this market long enough, you know how most of these euphoric bubbles end up. For those in the know, options, futures and specialized financial products are used as protection and speculation for both the rally and the fall.
CME Group (Nasdaq: CME) is the world's largest and most diverse futures exchange group, operating in four segments -- the Chicago Mercantile Exchange, the Chicago Board of Trade, the New York Mercantile Exchange and the Commodity Exchange.
Using both digital and open-outcry forums, the CME is a premier exchange where investors from around the globe trade everything from corn and oil to currencies, metals and even more mundane things like the S&P 500.
CME Group has also been in the news a lot over the past few months, thanks to its newest addition -- bitcoin futures, which launched in mid-December. I believe this product will be a very profitable venture.
As the market heats up and volume increases, so do CME Group's profits. That's because CME makes money on every single trade that's made in every one of its products. It also charges data fees if you want to see what's happening in real time.
The group handles 3 billion contracts worth approximately $1 quadrillion annually on average. (Yes... $1 quadrillion.)
That's a lot of fees to collect! And there could be even more coming.
High-Risk Times Mean High Earnings For CME
With the huge gains in many stocks, indexes, housing, energy and even bitcoin, savvy investors are getting ahead of the game and using futures and options to protect their holdings. I believe profits from "protective trades" are likely to grow exponentially over the next year, especially if there's a small correction.
You see, futures and options (which trade on the CME) allow investors to both speculate and protect gains they've already captured. So if a trader owns a large stake in the S&P 500, he can sell futures in SPX and "lock in" a sale price, even if the index declines. He could also buy put options to protect (insure) his position against a downturn.
And this is why CME is a "buy" here.
Analysts are only starting to predict a rise in trading revenues, targeting mid-single-digit growth. But I believe those profits will be closer to 9% in Q4.
Imagine pricing flood insurance just after a disastrous hurricane. Even if you don't know much about insurance, it's obvious that rates are higher in elevated risk areas, disaster-prone regions or during turbulent events.
And just as insurance actuaries increase rates in high-risk times, financial exchanges increase their rates (and profits) during times of heightened volatility, fear and/or potential market disasters.
Because so many traders and investors have made big gains since Trump took office, I also believe that more will be willing to pay data fees to CME Group so they can get a more accurate measurement of the current landscape and protect their portfolios accordingly. CME Group also hiked its fees because it knows that investors need to watch things closely and have extra money to spend on speculation and protection.
CME is also flush with cash -- almost $1 billion more than it targeted. The company tends to be very picky with its acquisitions, so analysts are predicting a good portion of that money could go to the annual variable dividend, making the stock all that more desirable to own.
I know this because the company just declared a $3.50 dividend on Jan. 16... and the stock actually rallied (which is atypical).
CME Is Still Undervalued
As we approach the company's earnings report -- scheduled to be released on Feb. 1 -- I believe investors will continue to move into the stock as they realize its increasing earnings potential.
The earnings report itself could be volatile, and my models are only showing an inline to modest beat... but it's the company's guidance and new revenue from bitcoin that excites me.
I believe a decent report coupled with a strong outlook will trigger analysts to raise their price target on the stock from current levels around $160 up closer to the $170 mark.
There is a chance the stock could experience a small drawdown on earnings, but I believe the chance for a rally outweighs the downside risk. For our purposes with this trade, we'll also give the stock enough time to recover and gain steam.
As shares look to break out of their technical resistance at $155, I see at least a 7.7% jump to $165 on the breakout, as well as the positive earnings outlook I believe the company will offer.
Our target for the stock will be $165 by June (hopefully way before). And thanks to the power of options, that 7.7% increase would be enough of a move for us to capture a potential 53% gain with using call options. That's 130.9% annualized.
Sounds crazy right? It isn't -- Wall Street uses the same strategy every day. If this still sounds risky to you, maybe because you're new to options trading, know that this trade breaks even if CME hits $159.80. That's just 3.5% above recent prices, a move that seems almost inevitable given the company's rapidly growing earnings potential.
How You Can Get In On This Trade
It wouldn't be fair to my premium Profit Amplifier subscribers to reveal the specifics of this options trade in this article. But my proven strategy could be just what you need to make more on your trades than you thought possible.
While the rest of the crowd is simply buying stocks and hoping for the best, my subscribers and I have spent years "raiding" the market with our simple options trades, taking more than our fair share of gains.
I'm talking about returns of 31%, 35%, and more -- all in a matter of weeks rather than months or years. In fact, we just closed a trade on Take-Two Interactive (Nasdaq: TTWO) for a clean 38.9% in just over four weeks.
Bottom line, my stock market raiding technique is the best way to increase your returns while preserving capital and reducing risk. Of course, that's only if it's done correctly.
That's why I created a special report that will walk you through the steps I take when going on market raids, which should help you avoid the costly mistakes many new traders experience. If you'd like to make trades like the one I described today -- or even potentially make 80% when a stock only moves 8% -- go here.
This article originally appeared on StreetAuthority.