Monday, January 25, 2010

Establish Potash Corp of Saskatchewan Inc. Covered Call

A new covered call position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Potash Corp of Saskatchewan Inc.(POT) as follows:

01/25/2010 Bought 100 POT @ $109.15
01/25/2010 Sold 1 POT Feb2010 $115.00 Call Option @ $3.10

This is a return to a successful covered calls position taken in POT early in 2009. The rationale in support of re-establishing an investment in Potash is similar to that stated previously, namely:
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. Although the price of potash has been relatively weak as a result of the worldwide recession, economic growth this year bodes well for both demand and pricing power. As the developing world (Especially China and India) continues to gradually improve their standard of living and 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. Potash Corp is very well managed, and 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 good 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).

Some possible overall performance results(including commissions) for the POT transactions would be as follows:
Stock Purchase Cost: $10,923.95
= ($109.15*100+$8.95 commission)

Net Profit:
(a) Options Income: +$300.30
= (100*$3.10 - $9.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $109.15):
-$8.95 = ($109.15-$109.15)*100 - $8.95 commissions
(c) Capital Appreciation (If exercised at $115.00): +$576.05
= ($115.00-$109.15)*100 - $8.95 commissions

Total Net Profit(If stock price unchanged at $109.15): +$291.35
= (+$300.30 +$0.00 -$8.95)
Total Net Profit(If stock price exercised at $115.00): +$876.35
= (+$300.30 +$0.00 +$576.05)

Absolute Return if Unchanged at $109.15: +2.7%
= +$291.35/$10,923.95
Annualized Return If Unchanged (ARIU) +37.4%
= (+$291.35/$10,923.95)*(365/26 days)

Absolute Return if Exercised at $115.00: +8.0%
= +$876.35/$10,923.95
Annualized Return If Exercised (ARIE) +112.6%
= (+$876.35/$10,923.95)*(365/26 days)