Potash (NYSE:POT) outperformed the market yesterday after the rumor mills reignited with takeover speculation. The latest theory is that Sinochem could be interested in acquiring the agro-chemical company.
The shares closed up more than half a percent at $149.49. Notably active on the options front were the October 165 call and 175 calls. These options, which are out-of-the-money and expire in less than six weeks, each saw more than 5,000 contracts trade on light open interest. In other words, it looks like this volume is trading on the opening side.
The 165 call saw a handful of large blocks trade between 10:20 and 10:30 A.M. Eastern Time this morning, going off for approximately $1.05 apiece. Large blocks traded in the 175 calls during the same tight time period and changed hands for 25 cents each.
The bid/ask spread is wide in POT options, but it looks as though the 165 call traded closer to the ask price while the 175 call went off closer to the bid. Like the Ford trade we discussed earlier, this appears to be a bull call spread. Because both calls are so far out-of-the-money, the premium paid to enter the spread is modest, at 80 cents per spread.
If POT – with or without a secure buyout offer – rallies above the 175 level between now and expiration on October 15, the maximum potential profit for this spread is $9.20 (the difference in strikes minus the debit paid). The maximum potential loss (if the options expire with POT still below the 165 strike) is 80 cents, for a return on risk of 1150%. To reach maximum profit potential, POT would need to rally more than 17% from its current level to clear the 175 mark.
Photo Credit: Scott Robinson
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Tags: Bull Call Spread, Option Volume, POT, Potash
