Options strategies for Mosaic (MOS) following brokerage upgrade

Options Strategies in Mosaic (MOS) Friday morning, as traders were focused on Goldman, BP, Google, and Citigroup, JPMorgan took some time to analyze the agricultural sector. The broker upgraded shares of Mosaic MOS to overweight from neutral and lifted its 12-month price target on the shares to $52 from $45. This represents nearly 20% of additional upside from the stock’s current level.

The covering analyst cited valuation as a driving force behind the upgrade, and said the fertilizer sector could be supported by corn prices. A rebound in global demand and a potentially strong fall season in the U.S. could also help Mosaic and its peers.

For investors interested in exploring an options trading strategy in Mosaic shares, we have outlined two spread alternatives below. The examples below are just hypothetical and do not represent buy/sell/hold recommendations. Always consider your risk/reward parameters before entering any trades. Prices are given as of Friday midday, when MOS was trading at $43.41, up 16 cents.

For insight into option strategies and other tricks of the trade, sign up for the Two Traders, One Strategy webinar series I host every Tuesday with our Senior Derivatives Specialist Jared Levy. This week we’ll be discussing married puts. Check out our entire library of free webinars at our events page.

Bullish Option Strategy: Long Call “Broken Wing” Butterfly

Investors who expect modest upside in the shares over the near term could consider a long call butterfly, which reaches the maximum profit if MOS moves modestly higher. The December 30/45/50 “broken wing” call butterfly can currently be purchased for a net debit of $8.25 by simultaneously trading the following:

Buy the December 30 call
Sell two of the December 45 calls
Buy the December 50 call

If MOS shares are trading right at the short strike ($45) when these options expire on December 17, the trader collects the maximum potential profit, which is $6.75, or the difference between the 45 and 30 strikes minus the premium paid. Losses are capped at the premium paid ($8.25) and occur if MOS shares are below $30 at expiration. This is a return on risk of 82% in less than six months.

Because this butterfly spread is of the “broken wing” variety, there is only one breakeven, of $38.25. At expiration, if MOS is trading anywhere north of this level, the spread will be profitable. Anywhere above the $50 level, meanwhile, gains are capped at $1.75, or the difference between the 45 and 50 strikes subtracted from the maximum potential profit.

Mosaic (MOS) long call butterfly

Bearish Option Strategy: Put Ratio Frontspread

Those who don’t agree with JPMorgan’s bullish sentiment and believe MOS could move moderately lower in the next couple of months could consider a relatively short-term put ratio frontspread. This strategy is created through the sale of two puts and the purchase of one closer-to-the-money put. An investor can buy one September 45 put and short two September 41 puts, collecting a net credit of 50 cents per spread.

The investor will keep this credit if MOS is trading anywhere above the 45 strike at expiration. To the downside, risk is capped only at $36.50 due to the fact that MOS cannot decline farther than zero.

Maximum potential profit, if the stock is trading right at the 41 strike at expiration, is limited to $4.50, or the difference in strike prices plus the premium collected. The breakeven for this strategy is $36.50 to the downside (the short strike minus the maximum profit potential). If MOS is trading above this level when options expiration occurs, this spread should yield a profit.

Mosaic (MOS) put ratio frontspread