Market Sentiment (Stocks on NYSE, NASDAQ, AMEX)

Aug. 14, 2013, 1:04 p.m. EDT

Is there a future in Potash?

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About Andrew Giovinazzi

Andrew Giovinazzi was a member of both the Pacific Exchange and the Chicago Board Options Exchange where he made markets in both equity and index option classes. During that period he never had a down year. In 1991, Andrew started and ran the Designated Primary Market Maker post for Group One, ltd in Chicago. In 2001, he co-founded Henry Capital Management. He became Chief Options Strategist and Option Pit Mentoring in the Fall of 2011. Andrew has a Bachelor's degree from the University of California, Santa Cruz in Economics. /conga/trading-deck/bios/giovinazzi_andrew.html 230100
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By Andrew Giovinazzi

On a very flat day in the market most of the action seems to be taking place overseas. Greece is now running a budget surplus, and China is back to growing again. Both of these items used to shake equity markets, but the summer of 2013 greets the good news with a yawn. I still think that is a long-term bullish thing for stocks. The problem is finding bargains in the US. That brings me to Potash Corp.

Potash  has had a mostly steady run riding the wave of demand for agriculture products over the last four years, but some issues have surfaced as the Russians are pulling out of a sales and marketing group called the Belarusian Potash Co. This could be a potentially serious problem as the Russians try to sell potash at cheaper prices in North America upsetting the status quo.

What happened to POT as a result was a big drop in the stock price to a two-year low. The two-year high is around $60, and POT is currently trading 31.25 bouncing off the high 28s over the last two weeks.

From an option-volatility perspective, Potash’s implied volatility (IV) is at a two-year high save for the big selloff in 2011 when the euro-zone issues overshadowed everything. Thirty-day IV is trading at 38% which gives a hint that POT is not done moving.

The upside skew in Potash out to September is severely elevated. That generally means paper has been bidding up the upside options in case the whole Russian issue turns out to be a tempest in teapot like the CEO has been saying. The Septempber upside skew before the big drop was more like a normal equity curve with declining volatilities from the at-the-money (ATM) options up to the out-of-the-money (OTM) calls.

POT skew

charts from

Looking at the two charts linked above, the market for volatility is taking a short-term view and a long-term view. The yellow chart is the September options curve and has a fair amount of upside speculation built into it. Upside trades like butterflies or ratio-call spreads (buying just less than selling contracts) would make sense since the debits to enter them are so much cheaper.

The green chart for December tells a slightly different story, as the upside calls are cheaper relative to the downside calls. This part of the term structure is attracting upside call sellers and protective put buyers for a longer term position. Also note how the ATM volatilities are both trading in the mid-30% range, so this is far from settled and option traders can see that in the pricing.

This is one stock I would like in IRA-type account. These big commodity producers are best bought when prices are low or when the market thinks prices are going lower since seller jump out of the names.

A potentially nice trade would be to sell OTM puts spreads in Dec two strikes wide, like the Dec 24/26 put spread. I use the put spread because I want to control the entry price in case I am short-term wrong but long-term right. This trade is what we call at Option Pit a modified Wheel Trade . The more aggressive step would be to add a long Dec OTM call and create a risk reversal for even money.

The intent here is to buy POT, and we adjust the short-term risk with a spread.

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