Surprise: Pot is good for you

Yes to Potash Corp

Agriculture and agri-services are a good play on the global agriculture boom in emerging markets. One stock I like is Potash Corp (POT) of Canada.

Potash is an integrated producer of fertilizer, phosphate, and nitrogen, which is used in fertilizer and in industrial/consumer products. POT produces over 20% of the world’s potash. With arable land decreasing due to expanding global cities and desertification, countries like China are increasingly increasing their fertilizer usage. This is a good trend for POT. If you get a chance, buy on any dips. I’m confident in this stock and would buy LEAP’s as well to get more return. The chart makes my eyes water with joy. As near perfect as you can get. Look at the 18 month chart below.

The 10 day simple moving average is above the 50 day and the 50 day is above the 200 day. The Macd and all indicators look great. This is long-term holding material.

Call Me Optimistic

So why did I buy a Call instead of the stock? Well let’s look at some math.

My calculations are based on this stock moving up $45 from the current $155 to a target price of $200.

If I start with $10,000 I can:

Buy shares:

• Able to buy 64 shares @ 155 = $9,920
• Profit= 64 x $45 = $2,880
• 29% absolute return

Buy options:

• Buy 3 Calls @ 29.50 = $8,850
• Profit=[$200(projected price) - $145(strike price) - $29.50(premium) ] x 3 contracts = $7,650
• 86.4% absolute return

The above is obviously simplistic. I didn’t include commissions since they are minimal. The stock trades would have been $2.00 round trade. The options would have been $4.50. Also with the options time goes against me. That is, if the stock hits a bump and dips then the odds of my option being in the money decreases. However if all goes as planned, I’m a happy camper. In other words time decay is not reflected in my example. The other thing to note also is that the option will move much more than the stock which can be a bit unnerving at time. My experience with Potash has been good so far. I will most likely hold it until June and add position given the opportunity.

[Disclosure: I hold 3 POT Sept 08 $145 Calls purhcased @ $29.50 on Feb 15]