An Options Play for Potash's Failed Merger

| About: Potash Corporation (POT)

Thank God for Tony Clement!

I’m probably the only Potash (NYSE:POT) shareholder to ever say that out loud. But with the shares closing at $152.56 Wednesday, there are plenty of people who should be grateful that Minister Clement didn’t allow them to tender to BHP Billiton (NYSE:BHP) for $139/share, or $145 for that matter. A mere few weeks have passed, and investors are much better off as a result of the Federal government’s decision to recognize that the Potash acquisition, as proposed, had no net benefit for Canada.

Now that we’re all paying closer attention to Potash, what can investors do to make money despite the fact that the likelihood of an M&A takeout is gone? Play a covered call strategy. The international focus the failed M&A deal brought to the underlying assets of Potash, plus its role as a hedge fund momentum stock to ride daily economic news, makes for juicy premiums in the POT option chains.

Although I’m not licenced to give retail investment advice, and rarely talk about individual trading strategies, Potash seems perfect for a plain vanilla covered-call writing trading strategy for experienced investors. How many investment strategies can you be happy with regardless of the movement in your investment on any given day? Although, like most investment strategies, you have to have a good long term feeling about the solvency of the stock you are trading. Equity research analysts love Potash, and it is no longer an unknown story for global investors. It definitely fits the bill.

Take Wednesday, for example:

Buy 100 shares of Potash at $152.56
Sell 1 February 2011 155 call at $6.05

Fast forward to the third Friday in February:

  • If Potash is over $155/share, your call will be in the money and your 100 shares will be called away to settle the short position. You’ll have made $244 on the stock, and $605 on the option

  • If Potash is trading at $145/share come the third Friday in February, your call will expire and you’ll pocket the $605. You’ll be down $756 on the stock, but will be able to re-short the March or April $150 call for anywhere between $2.00 and $3.75

etc. etc.

Like any trade, this one has risks. It may not be suitable for everyone, and you should consult with your own investment advisor before trying it on for size yourself. But as a late holiday present, Potash keeps on giving.

Disclosure: I own POT and am short POT calls