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Option Player Sees a Bounce for Potash Corp./Saskatchewan (USA) (POT)

Breaking down a bullishly biased option spread on beleaguered POT

by 8/6/2013 12:13 PM
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The shares of Potash Corp./Saskatchewan (USA) (NYSE:POT) are within a hair's breadth of new-multi-year-low territory, after Susquehanna slashed its price target on the stock to $27 from $37. Nevertheless, at least one option trader is keeping the faith, implementing a bullishly biased spread strategy to bet on a rebound north of $30.

Specifically, the speculator bought to open a block of 3,445 September 30 calls for the ask price of $1.24. However, to minimize risk on the trade, the investor simultaneously sold an equal amount of September 33 calls for the bid price of $0.47. Implied volatility is higher at both strikes, underscoring our theory of a new bull call spread, established for a net debit of $0.77 per pair of contracts.

To profit on the play, the strategist needs POT to surmount $30.77 (bought call strike plus net debit) by back-month options expiration. From POT's current price of $29.00, it would take a rebound of 6.1% in order to hit breakeven. But, while the sale of the 33-strike calls limits the spread buyer's breakeven level and maximum risk (to the initial net premium paid), it also caps his maximum profit potential at $2.23 (difference between strikes, less net debit), no matter how high POT should soar north of $33.

So, why didn't the trader simply buy the 30-strike calls? Probably because POT options are more expensive than usual right now. The stock's Schaeffer's Volatility Index (SVI) sits at 45% -- a 19-percentage-point pop since July 26. This ratio sits higher than 81% of all other readings of the past year, suggesting POT's short-term options are relatively pricey.

Right now, POT is trending in the wrong direction for the strategist, down 1.7%. The stock has shed nearly 29% so far in 2013, mostly thanks to a sector-wide slump in late July. Against this backdrop, it's not too surprising to find puts outnumbering calls lately. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.04 sits just 12 percentage points from a 52-week high, implying that near-term option traders have rarely been more put-skewed toward Potash Corp./Saskatchewan (USA) (NYSE:POT) during the past year.


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