Potash Corp. of Saskatchewan (POT) moved higher yesterday after Morgan Joseph upped its rating of the shares to “buy” from “hold.” Rising potash prices were cited by the upgrading analyst as a primary driver behind the ratings change. POT ended Friday’s session at $116.81.
Unlike brokerage houses, options traders have the flexibility to do more than “buy,” “sell,” or “hold.” The variety of option strategies available in the marketplace allow people to place trades based on predictions for price action, volatility moves, or other market influences. Below are two ways – one bullish, one bearish – you might use to trade Potash options. These are not buy-sell-hold recommendations, just potential strategies for bulls and bears.
Bullish Options Trades in Potash (POT)
If you are bullish on the stock and expect continued upside (or at least limited downside) you might consider selling a bull put spread in the June series. To do this you could go long in the June 110 put and simultaneously short the June 115 put, collecting a net credit of $2 or better (which is the maximum potential profit). Maximum potential loss is $3, giving the strategy a return on risk of 66%. If POT is trading above $113 when June options expire, the trader will make some or all of the maximum potential profit. This allows the stock more than 4% of downside before losses set in.
Bearish Options Trades in Potash (POT)
Those who aren’t fans of Potash could consider buying puts. The April 115 put (which is currently out-of-the-money) can be bought for $4.40 or less. A put buyer can lose 100% of the premium paid, but can profit as much as $110.60 if the stock were to fall all the way to zero. If POT drops below $110.60 by the time the April options expire, these puts will be in profitable territory.
POT shares have gained almost 30% in the past six months … do you see this trend continuing or do you expect a bump in the road for the shares? Which way would you play the Potash trade?
Photo Credit: Wallyg
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