Monday, December 22, 2008

Establish Potash of Saskatchewan Corp Covered Calls


A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Potash of Saskatchewan Corp (POT). This is a repeat of a successful covered calls position taken in POT last month which concluded with the call option being exercised and the POT stock was called away at options expiration last Friday.

The rationale in support of re-establishing an investment in Potash remains the same as stated previously when the POT covered calls position was established last month, which was as follows:
Potash Corp (POT) is the world's largest producer of crop fertilizers and they produce each of the three primary fertilizers (potash, phosphates, and nitrogen-based products). Of these three, potash is the most beneficial to farmers in terms of enhancing the productivity of arable acreage; consequently potash is in greatest demand and has the best profit margins of the three fertilizers. Potash Corp. ranks #1 in the world in potash production with about 22% of the world's supply. They are, therefore, in a very enviable position because of the relatively high cost to establish new potash production mines. The stock price of POT has plummeted this year at an even faster rate than the overall market, but this advisor believes that worldwide recession fears have created a temporarily depressed demand for fertilizers along with a steep, but also temporary, decline in feed grain and oilseed futures prices. But as the significant worldwide growth in the numbers of people moving up into the middle class continues (especially in China and India), and they continue to improve their diets (including more protein), the ongoing strong demand for more and more fertilizer will continue. Consequently, prices for corn, soybeans, and wheat are likely now to be reaching the lower end of their future price range, and POT is well positioned for a very nice price rebound when crop prices firm up. In the meantime, Potash Corp maintains their commitment to steadily increasing production capacity to meet the growing demand while maintaining good profit margins and a strong balance sheet. Finally, there is great value in the company's current stock price when it is evaluated in relation to key financial ratio metrics (including P/E ratio, free cash flow, and return-on-equity among others).

Today a covered calls investment was established with the purchase of Potash (POT) and the selling of the Jan09 $65 call options:
12/22/08 Bought 200 POT @ $65.84
12/22/08 Sold 2 POT Jan09 $65.00 Calls @ $5.90

Annualized Return If Unchanged (ARIU): +107.8%
Annualized Return If Exercised (ARIE): +107.8%
Downside Breakeven Protection: 9.0%

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