Between the 10 percent drawdown and key technical support level approaching, Potash (POT) and the rest of the Ag community has had a rough few days.
The rip higher in implied volatility also makes a bull put spread attractive as we can distance the trade in case of further downside. It also allows us to enter into a Vega negative trade, meaning a fall in implied volatility will help the position.
The recent spike in volatility has also enabled the opportunity to sell options for the first time in months. 30-day implied volatility has spiked to 48 percent while 20-day historical volatility resides at 37 percent. By selling options we can capture some of the pent up premiums being priced into the options.
Barring a further 13 percent fall in Potash price between now and March expiration, this position will return around 25 percent in 23 days.
Be aware that Potash is scheduled to split 3:1 on Friday. We see this as offering another bullish argument for the stock as it becomes an easier asset to purchase at $55 than $165 per share.
Overall, the Ag demand and supply story has not changed despite this recent pullback and it won’t be long before investors re-gain these views.
Please note we have added to our $SPX hedge as we enter new Delta positive positions at these levels.
Trade Idea:
SELL -5 VERTICAL POT 100 MAR 11 150/145 PUT @1.04 LMT
Trade Details:
Type: Bull Put Spread
Expiration Month: March
Breakeven Level(s): $148.96
Maximum Gains: $520
Profit Taking Level: $250
Maximum Loss(es): -$1,980
Stop Loss: -$420
