CME Group (NASDAQ: CME - option chain) is one of the few stocks rising today after an article in the latest Barron's called CME one of its top picks to weather the current storm, because it can generate a lot of cash in a tight credit environment. Even if CME doesn't rise in the next few months, this kind of sentiment could help the stock at least maintain its current price. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on CME.

CME opened this morning at $358.00 So far today the stock has hit a low of $353.63 and a high of $384.99. As of 12:35, CME is trading at $371.00, up $8.70 (2.4%). The chart for CME looks neutral and S&P gives CME a 3 STARS (out of 5) hold ranking.

For a bullish hedged play on this stock, I would consider an October bull-put credit spread below the $280 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.5% return in just two weeks as long as CME is above $280 at October expiration. CME would have to fall by more than 24% before we would start to lose money. Learn more about this type of trade here.

CME hasn't been below $282 at all in the past year and has shown support around $350 recently.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in CME.

If Chicago Mercantile Exchange traders are betting right, housing prices in ten key housing markets will continue to drop until 2011 [subscription required], according to the Wall Street Journal this morning. The Miami area is the worst hit and expectations are that it will drop another 27.9% between November 2007 and November 2011. Others expected to fall in the same time period include San Francisco (down 25.9%), San Diego (down 18.6%) Las Vegas (down 18.1%), Los Angeles (down 15%), Denver (down 14.4%), Boston (13.8%), Washington, D.C. (down 13.3%), New York (12.1%) and Chicago (down 6.6%).

The CME contracts are based on expected movements of the S&P/Case-Shiller house price indexes. Trading is light, so this report gives us a less-than-scientific view of what might happen in the housing market. Personally. I believe this might be too gloomy a prediction. While prices do still need to drop in most of the areas currently facing a decline in order to get the markets moving again, I'm not sure they need to drop as much, nor for as long.

On tonight's Mad Money on CNBC, Jim Cramer talked up his DJIA target of 14,582 at year-end and DJIA components (Cramer did this in batches before with individual targets: A-B group, then some middle names, and another group). He also said he's backing the Chicago Mercantile Exchange, or the CME Group, Inc. (NYSE:CME). He thinks this will benefit hugely from the increased volume and the increased volatility in futures. This is one he thinks that can raise fees because they are so large in market share now that the CME/CBOT merger went through. He even said this may be a secular growth story and even thinks the stock is cheap. The company now has accelerating revenue growth for growth managers, and he thinks estimates could be too low.

Let's hope THIS exchange pick from Cramer does better than his pick of the shares in the New York Stock Exchange, or the NYSE Euronext (NYSE: NYX), which was Cramer's #1 Growth Pick for 2007. This quarter did actually look OK for the NYSE, but at under $75.00 shares are still way off of yearly highs of $112.00. CME has a lot of integration work remaining for the CME/CBOT merger, but after having personally officed in the CBOT Building and spending a lot of time over at the CME Building (and maybe even a few happy hours at each, allegedly) these did create the monster exchange. The combined entity will also force other exchange mergers even if for no other reason than survival or relevance.

Monday July 9

• The Chicago Board of Trade (NYSE: BOT) and Chicago Mercantile Exchange Holdings Inc (NYSE: CME) to hold a special shareholder meeting in Chicago about merging at 4pm.
• Take-Two Interactive Software (NASDAQ: TTWO) to hold a business update at 4:30pm.
• Alcoa Inc (NYSE: AA) to report Q2 earnings; conference call at 5pm.

Tuesday July 10

• Electronic Entertainment Expo, or E3, to be held from July 10-July 13 in Santa Monica, California.
• The Home Depot Inc (NYSE: HD) to release a 2007 Sales Update at 9am.
• Sealy Corporation (NYSE: ZZ) to report Q2 earnings; conference call at 5pm.

Chicago Mercantile Exchange Holdings Inc. (NYSE: CME) opened at $533.30. So far today the stock has hit a low of $533.30 and a high of $539.45. As of 10:55, CME is trading at $535.87, up $2.47 (0.5%).

After hitting a one year high of $596.30 in January, the stock has trended slightly downward over the past six months, bouncing off support at $500 in May. Chicago Board of Trade (NYSE: BOT) management is urging shareholders to vote for a merger with CME rather than the competing offer from Intercontinental Exchange (NYSE: ICE). A vote will be held on July 9. Recent technical indicators for CME have been bullish but deteriorating, while S&P gives the stock a very positive 5 STARS (out of 5) strong buy rating.

For a bullish hedged play on this stock, I would consider a July bull-put credit spread below the $500 range.CME hasn't been below $500 for more than a day since November and has shown support around $508 recently. This trade could be risky if broader markets take a tumble, but CME is not scheduled to report earnings until the week after July expiration.

Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in CME, BOT, or ICE.

Note: The Daily Option Update is provided by Stock Options Specialist Paul Foster of theflyonthewall.com.

Volatility Index S&P 500 Options-VIX down 1.47 to 15.80

Chicago Mercantile Exchange Holdings, Inc. (NYSE:CME) - April option implied volatility increases on ICE offer for BOT.
CME is recently down $14.94 to $548.78. The ICE announced an offer to issue 1.42 shares for each BOT share. CME and BOT announced a merger on 10/17/06. CME is paying 0.3006 shares for each BOT share. Shareholder votes by CME and BOT shareholders are set for 4/4/07. Smith Barney says: "if the CME/BOT deal does not go through, investors could bid up NMX shares on speculation of a CME/NMX deal." SBSH has a Hold rating on CME. CME April option implied volatility of 31 is above its 26-week average of 29 according to Track Data, suggesting slightly larger risk.

NYSE Group Inc. (NYSE:NYX) call volume heavy on spreaders adjusting on evolving Fundamentals.
NYX is recently up $0.70 to $83.01. The ICE announced an offer to issue 1.42 shares for each BOT share. CME is paying 0.3006 shares for each BOT share. Shareholder votes by CME and BOT shareholders are set for 4/4/07. Smith Barney says "if the CME/BOT deal does not go through, investors could bid up NMX shares on speculation of a CME/NMX deal." NYX call option volume of 38,141 contracts compares to put volume of 10,864 contracts. NYX April option implied volatility is at 33, puts are at 43. NYX 26-week average option implied volatility is 40 according to Track Data. NYX puts are expensive because NYX is difficult to borrow.

Option volume leaders today were: Accredited Home Lenders Holding Co. (NYSE:LEND), NYSE Group Inc. (NYSE:NYX) and Apple Inc. (NASDAQ:APPL).

With a "bewildering array" of financial instruments to choose from, Nathan Slaughter, the editor of Half-Priced Stocks notes that investors often forget the potential of investing directly in those exchanges themselves.

For long term growth and value investors, Slaughter says, "These exchanges take a small cut from every market transaction." In other words, he explains, "think of these highly profitable companies as 'toll keepers,' charging a fee to anyone who wants to drive on their trading network."

So which exchanges should you invest in? First, he considers the NYSE Group, Inc. (NYSE: NYX), which he notes is the world's largest and most liquid stock exchange, with about 2,700 listed companies valued at more than $23 trillion.

Over the past few years, a variety of securities and commodities exchanges have gone public. For the most part, it has been lucrative for shareholders.

Now, with the high valuations, these exchanges are engaging in M&A.

And why not? Exchanges benefit from scale – in terms of consolidating trading systems, as well as offering products for investors. It's kind of like the value proposition of eBay. The bigger the network, the more valuable it generally becomes.

Well, the latest deal in the exchange business is the Chicago Mercantile Exchange's (CME) $8 billion purchase of the Chicago Board of Trade (CBOT).

The deal is vitally important for the CBOT.