Recommendation No. 1: CF Industries (NYSE: CF)

“Sell to Open” CF Industries November $230 Call

Option Symbol: CF121117C230

Limit Order Price: $7.95 or more

Directional View for Underlying Stock: Neutral

Personal Finance Portfolio: Growth

• Income generated: $795 per options contract (representing 100 shares of stock)
• 57-day rate of return at current stock price of $222.82: 3.6 percent (22.8 percent annualized)
• Tell your broker:

“I want to sell a covered call against 100 shares of my CF Industries (CF) stock. Specifically, I want to ‘sell to open’ one November $230 call for a credit of $7.95 per share or more.”

• Remember: You should only sell one call option per 100 shares of stock purchased. The trade can only be done in 100-share increments (100, 200, 300, 400, 500, etc.).

Alternative Trade for Those Who Don’t Already Own CF Industries:

Buy/Write on CF Industries (NYSE: CF): Buy the Stock and Simultaneously “Sell to Open” the November $230 Call

Option Symbol: CF121117C230

Limit Order Price: $214.87 or less (stock is at $222.82 and November $230 call is at $7.95)

Directional View for Underlying Stock: Neutral

Personal Finance Portfolio: Growth

• Net cost of buy/write: $21,487 per 100 shares
• 57-day return if stock does not move: 3.6 percent (22.8 percent annualized)
• Brokers vary as to whether they call this trade a “buy/write” or a “covered stock” trade.
• Do the trade simultaneously at a single limit price, if possible. For example, if you want to buy 100 shares of stock, tell your broker:

“I want to do a buy/write trade. Specifically, I want to buy 100 shares of CF Industries (CF) and ‘sell to open’ one November $230 call for a net debit of $214.87 per share or less.”

• Some brokers require that you buy the stock and sell the call in separate trades. If your broker is one of these, always buy the stock first and sell the call against it second:

Trade No. 1:

“I want to buy 100 shares of CF Industries (CF) for $222.82 per share or less.”

Trade No. 2:

“I want to sell a covered call against 100 shares of my CF Industries (CF) stock. Specifically, I want to ‘sell to open’ one November $230 call for a credit of $7.95 per share or more.”

Please note: When doing a buy/write trade in two steps rather than in one simultaneous trade, the important thing is to limit the net cost of the buy/write to $214.87 per share. The specific limit prices of the individual “buy stock” and “sell covered call” trades are just starting points and should be adjusted as needed, keeping the net cost of the overall buy/write in mind.

• Ex-Dividend Date: The stock’s next quarterly ex-dividend date is around November 8th. If the November $230 call is in the money at that time, there is a chance that the call owner will opt to exercise the option early in order to capture the $0.40 quarterly dividend. In such a case, an early roll of the covered call may be warranted.

• Why the November $230 Strike?: Personal Finance has set a “buy below” target for CF Industries of $220 per share. With CF Industries trading 1.3 percent above that target level at $222.82, the stock has gotten ahead of its fundamentals and more upside is unlikely. Although second-quarter earnings were a record high, sales actually fell 3.7 percent due to slowing global demand for phosphate fertilizer. To be sure, the company’s nitrogen fertilizer demand remains strong, but continued weakness in phosphate demand could hinder CF’s future growth because phosphate sales account for 20 percent of CF’s business.

Price Adjustments Regarding This Trade

Stock prices are currently fluctuating and option prices fluctuate with them. Consequently, the limit prices recommended in this trade alert may no longer be immediately fillable by the time the alert has been released. The alerts are valid for seven days, so be patient and place your limit orders as “good ‘til canceled” (GTC) for seven days.

Investment Rationale for Underlying Stock:

Record-setting temperatures and widespread drought over the summer clobbered the US Corn Belt.

In early July, for example, the US Dept of Agriculture (USDA) considered only 40 percent of the US corn crop to be in good or excellent con­dition, compared to 70 percent in a normal year.

To make matters worse, half of the US corn crop had already “silked,” compared to less than 20 percent in an average year at that point in the growing season. When corn silks, it has reached the pollination stage and is most vulnerable to drought. That meant much of the crop damage was irreversible.

By mid-July, corn prices had already surged nearly 50 percent from their May low to more than $7.30 per bush­el. In addition to corn, poor growing conditions pushed up prices for other key agricultural commodities such as soybeans and wheat.

This year’s drought was the worst in the US since 1988, when prices almost doubled be­tween May and July. Drought plagued roughly 56 percent of the contiguous US, the most extensive water shortage in the 12-year history of the USDA’s Drought Monitor.

In the near term, weather conditions will drive the bull market for ag­ricultural commodities. However, the long-term outlook appears equal­ly sanguine, thanks to surging meat consumption in emerging markets, epitomized by China.

As consumers increase their meat consumption, there’s a mas­sive multiplier effect. It takes 7 kilograms (15.4 pounds) of feed grain to produce 1 kilogram (2.2 pounds) of beef; 4 kilograms (8.8 pounds) of grain to produce 1 kilogram of pork; and 2 kilograms (4.4 pounds) of grain to produce 1 kilogram of chicken.

Rising prices for agricultural com­modities fuel demand for products that enable farmers to boost crop yields, including fertilizer.

CF Industries (NYSE: CF) is the largest North American producer of nitrogen-based fertilizer.

Natural gas prices account for up to 90 percent of the cost of producing nitrogen-based fertilizers. US natural gas prices are by far the lowest in the world and should remain depressed over the next few years. This cost advantage gives CF Indus­tries a considerable leg up on overseas competitors.

Corn is the most nitrogen-intensive major field crop; increased US corn acre­age relative to soybeans and wheat will boost demand for the nutrient.

CF Industries reported record second-quarter earnings of $606.3 million, a year-over-year increase of 24 percent. Sales dropped 3.7 percent to $1.7 billion. The company has reaped the benefits of rising corn prices; gross margins improved 12 percentage points to 60.1 percent.

The company sold 3.5 million tons of nitrogen in the second quarter, down from 3.8 million tons last year. However, with the tight nitrogen supply and high global demand for the 2013 season, the company estimates improved figures for the rest of 2012.

CF Industries is rated as a buy below 220 in the Personal Finance Growth Portfolio.