Two Ways to Trade Potash Corporation (POT)
Panelist Tim Seymour picked Potash Corp. of Saskatchewan (NYSE: POT) as his choice for the next session’s “best trade” on a recent episode of CNBC’s Fast Money, indicating a bullish position on the stock.
Seymour is going against the short-term trend, as POT shares have lost almost 12% since peaking on March 16. During the same time frame, the broader market has gained more than 5%. POT is currently sitting around $110.55.
While stock investors are banking on one of two scenarios – whether the stock will move higher or lower. Option traders can take advantage of strategies that are driven not only by price action, but also by the factors of time decay and implied volatility. Options can often require less capital up front and can carry less risk than the stock trade outright.
Rather than buying 100 shares of POT for more than $11,000, an investor could consider options strategies that would mimic Tim Seymour’s bullish suggestion. Contrarily, there are strategies that might work for investors who feel POT will continue to underperform the market.
Below are two hypothetical trades that are not buy-sell-hold recommendations, just examples of how different options strategies work. Note that Potash is scheduled to report earnings on or around April 29, and may be increasingly volatile around and immediately following this event.
*Prices given as of Monday midday
Bullish Option Strategy: Call Butterfly
An investor who expects upside in POT could consider a “broken-wing” call butterfly, which could be executed by buying one September 80 call, selling two September 120 calls, and buying one September 130 call, paying a total net debit of $22.45. If POT is trading right at $120 when these options expire, the trader collects the maximum potential profit of $17.55. Losses, meanwhile, are capped at the premium paid (plus commissions) and come into play below the 80 strike.
Due to the “broken wing” nature of this trade there is only one breakeven at $102.45. Anywhere above 130, the trader will earn $7.55, or the maximum potential profit minus the difference between the short strike (120) and the higher-strike long call (130).
Bearish Option Strategy: Bear Put Spread
A trader who expects continued sluggishness in POT could buy the June 130/110 bear put spread by buying the June 130 put and selling the June 110 put, paying a net debit of $14.50. Maximum loss is limited to this premium paid and maximum profits are capped at $5.50, which the investor can collect if POT is trading below $110 at expiration. Breakeven for this trade is $115.50; the spread will be profitable anywhere below this level.
What’s Your Take?
Will Potash (POT) prove Tim Seymour right or is further downside ahead?
Compare OptionsHouse rates for stock options with other brokers. For investors who are new to options and want to try out their trades without committing real money, practice using a free virtual trading account.
Photo credit: Jerry
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