At this time last year, the U.S. was in the midst of the most severe and extensive drought to hit the country in the past 25 years. The inclement conditions had a serious impact on the agricultural sector, reducing crop yields and driving up prices.
This year, lack of rain is not an issue. In fact, heavy rains and flooding have delayed planting, damaged crops already in the ground and prevented farmers from sowing all their seeds.
One company that benefits directly from farmers’ need to combat Mother Nature’s whims and increase crop yields is Potash Corp./Saskatchewan (USA) (NYSE:POT).
After hitting a low below $30 in 2010, shares of the world’s largest fertilizer company staged a key breakout from the $37 level in August of that year. They went on to more than double from those lows, hitting highs near $63 in 2011.
Since late summer 2011, Potash Corp./Saskatchewan (USA) (NYSE:POT) has traded in a range between $37 and $50. It is currently sitting just above key support at the bottom of that channel. A move to the top of that range at $50 is the first target, and a break of that resistance level targets a run to the 2011 highs near $63.
The initial $50 target is about 32% higher than current prices, but traders who use a capital-preserving, stock substitution strategy could more than double their money on a move to that level.
One major advantage of using long call options rather than buying a stock outright is putting up much less capital to control 100 shares — that’s the power of leverage. But with all of the potential strike and expiration combinations, choosing an option can be a daunting task.
Simply put, you want to buy a high-probability option that has enough time to be right, so there are two rules traders should follow:
Rule One: Choose an option with a delta of 70 or above.
An option’s strike price is the level at which the options buyer has the right to purchase the underlying stock or ETF without any obligation to do so. (In reality, you rarely convert the option into shares, but rather simply sell back the option you bought to exit the trade for a gain or loss.)
It is important to buy options that pay off from a modest price move in the underlying stock or ETF rather than those that only make money on the infrequent price explosion. In-the-money options are more expensive, but they’re worth it, as your chances of success are mathematically superior to buying cheap, out-of-the-money options that rarely pay off.