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Option Bulls Take Aim at Potash Corp./Saskatchewan (USA) (POT)

Potash Corp./Saskatchewan (USA) option players are buying 37-strike calls

by 6/16/2014 2:08 PM
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Option Brief: Potash Corp./Saskatchewan (USA) (NYSE:POT) is 2% higher at $36.76, after the company rescinded layoffs at its Penobsquis, New Brunswick facility. Over in the options pits, meanwhile, speculators are gambling on more short-term upside for the potash producer, with intraday call volume running at twice the normal pace.

So far today, POT has seen roughly 12,000 calls cross the tape, compared to its average intraday volume of fewer than 5,000. For comparison, not even 1,800 POT puts have changed hands thus far. Demand for short-term contracts is soaring, as the equity's 30-day at-the-money implied volatility (IV) has jumped 8.8% to 19.1%, and nine of the 10 most active options expire within the next five weeks.

Digging deeper, the overhead 37 strike has been a favorite among option bulls. The June 37 call has seen nearly 2,700 contracts exchanged, while the July 37 call is most active with more than 3,100 contracts traded. Roughly two-thirds of the calls crossed on the ask side, and IV is trending higher at both strikes, hinting at buy-to-open activity.

The volume-weighted average price (VWAP) of the front-month call is $0.17, meaning the buyers will reap a reward if POT is docked north of $37.17 (strike plus VWAP) at Friday's close, when the options expire. Profit potential is theoretically unlimited north of breakeven, while risk is capped at the initial premium paid for the contracts, should POT remain south of $37 through the end of the week. In light of the security's advance today, delta on the call has jumped to 0.33 from 0.14 at Friday's close, implying a roughly 33% chance of expiring in the money.

Due to an added month of time value, the VWAP of the July 37 call is $0.56, making at-expiration breakeven $37.56. Likewise, the odds of expiring in the money are greater for the longer-dated call, compared to its shorter-term counterpart, as delta has rocketed to 0.46 from 0.31 at Friday's close.

Technically speaking, Potash Corp./Saskatchewan (USA) (NYSE:POT) is now 11.5% higher year-to-date, and is poised to close atop its 20-day moving average for the first time since May 21. From a longer-term perspective, the equity has advanced nearly 29% since touching a three-year low of $28.55 in early August, with its 10-week and 20-week moving averages emerging as support in 2014.


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