As the bull train keeps chugging along, individual stocks continue to provide profitable opportunities.
While the upward thrust of the equities market has been on pause for the last few trading sessions, we’ve yet to see any attempt whatsoever from the bears to take this market lower.
One stock in the agriculture space that is setting up nicely is Potash Corporation of Saskatchewan (NYSE:POT). During the past week, it has established a light-volume retracement to its rising 20-day moving average in what could become a low-risk, dip-buying opportunity.
If buyers step up and defend the potential support level around $46, another leg higher in this popular fertilizer stock may be in the offing.
Don’t want to spend $46 on the shares? For a cheaper, limited-risk way to exploit continued upside, you can purchase the POT March 45-50 bull-call spread for a net debit for $2 or cheaper.
To enter the position, you would “buy to open” the POT March 45 Call while “selling to open” the POT March 50 Call. The maximum risk in the position is limited to the initial debit paid ($2), and will be incurred if POT sits below the lower-strike call ($45) at March expiration.
Prices that work right now are paying $2.70 for the long $45 call and collecting 70 cents for the short $50 call. However, what you pay/collect for the individual legs of the spread doesn’t matter, as long as you get in for $2 or under.
The maximum reward is limited to the distance between strikes ($50 – $45 = $5) minus the net debit, or $3 ($5 – $2). To capture the max profit, POT must rise above the $50 strike by March expiration.
Since the accumulation of profits in a long vertical call spread (i.e., a spread with options that expire in the same month) like this can be somewhat sluggish toward the later stages of the trade, you might consider closing the position once you’ve captured around 50% of potential profits.
At the time of this writing Tyler Craig had no positions in POT.