Options Strategists on the Prowl at Potash Corp.

POT – Potash Corp. of Saskatchewan, Inc. – Investors are utilizing options on the Canadian potash producer to speculate on the direction shares are likely to take in the event that BHP Billiton opts to up their bid for the company from $40 billion. Potash Corp.’s shares fell as much as 4.1% this morning to an intraday low of $139.50 on news Canada sided with POT management’s opposition to the deal by blocking BHP’s hostile takeover bid. The ruling gives BHP until December 3, 2010, to revise its offer before a final decision is made on the matter. During the course of the session, POT’s shares parsed some of the earlier losses, and are currently trading 2.75% lower on the day at $141.48 as of 3:25 pm in New York. More than 337,000 option contracts have already changed hands on the stock with 35 minutes remaining before the final bell. One speculator eyeing the potential for POT’s shares to rally if a higher bid is extended by BHP initiated a sizeable call spread on the stock. The trader picked up 11,250 calls at the December $150 strike for a premium of $2.80 each, and sold the same number of calls at the higher December $160 strike at a premium of $0.85 apiece. The net cost of establishing the spread amounts to $1.95 per contract. Thus, the investor is prepared to make money should POT’s shares rally 7.4% over the current price of $141.48 to exceed to effective breakeven point on the spread at $151.95 by December expiration. The call-spreader could end up pocketing maximum potential profits of $8.05 per contract if the fertilizer manufacturer’s shares jump 13.1% to trade above $160.00 ahead of expiration day next month. Canada’s ruling on the hostile takeover took some wind out of the sails of uncertainty and sent POT’s overall reading of options implied volatility down 20.1% to 31.16% in late afternoon trading.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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