STO (5) Naked Put - IPI (INTREPID POTASH INC) Aug 09 @ $25 Strike for $1.45 each. Net Premium $721. I am taking a larger than normal position on this one after doing some extensive research. Just some important notes that influenced my decision:
* IPI has NO DEBT
* Potash (their primary market) has slumped this year after an extreme price spike last year.
* Potash is a fertilizer and because of its price spike last year many farmers (several I have talked to locally here also) have decided to skip applying the potash component of their fertilizer. From several sources I have read this is creating a low nutrient level in much agriculture land across the country. This deficiency is ok for about 1 year but each time a crop is planted it removes more of the nutrients to the soil. In spring 2010 farmers will have to either not grow crops or replinish the potash in their soil. (sidenote: I know this is true because I maintain about 10 acres of wildlife foodplots. I can skip fertilizing for 1 year and be "ok" but I can't skip 2 years or I might as well not plant.)
* China currently only comsumes 13% of the world potash. As they are attempting to increase their own production of agriculture and become less dependent on the rest of the world I believe their appetite for fertilizer will increase
* Earnings are due out August 7th and are projected to be 30 cents per share. I think they will beat this estimate.
Risk Management:
Ticker: IPI
Expiratoin: 21-Aug-09
Invest Date 31-Jul-09
Current Stock Price $25.40
Strike Price $25.00
Premium $1.45
Annual Dividend $-
Days to Expiration 21
Return (Assumes CSP) 5.80%
Annualized Return 100.81%
Downside Protection 7.28%
Effective Dividend if Put 0.00%
Monthly Options Expiration Results through May 17th, 2024
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Each month after the monthly options expiration date, this summary report
provides the results on all positions that have been closed out during the
past m...
7 hours ago
Chris,
ReplyDeleteI guess the same argument holds true for POT? I understand POT is a better run company (fundamentals-wise) than IPI.
Also, even if your argument for increased demand for potassium materializes next year (2010), you are selling short-term premium that may not directly benefit your trade. Thoughts?
I have not looked at POT directly because of the stock price and smaller premiums for options. But yes in theory I would think it would hold.
ReplyDeleteThe increased demand in 2010 serves as my safety net from the stock falling too far or if put the stock my short term ability to sell the stock and not get hit with a loss. This trade is not to benefit from the 2010 performance but rather to benefit from the stability of the stock price in 2009 (much of which I do believe will come from projections of 2010).
A covered call (or naked put) investor's biggest enemy is a sharp decline in stock price. Therefore a great deal of my research is to find companies that will not fall into that trap. For example the low debt of IPI.
Chris,
ReplyDeleteI respectfully disagree with mrmo2's assessment that IPI is fundamentally inferior to POT. IPI has both greater gross and operating margins than either POT or MOS. It's ROA and ROE are also similar to or exceed those of its competitors.
Regards,
Troy
PS. Excellent write-up on your DD.
ReplyDeleteChris thanks for clarifying. That makes sense.
ReplyDeletePS: Keep up the great work with this blog. I enjoy reading your postings here and on justcoveredcalls list.
Chris,
ReplyDeleteI am new to CC and find it fascinating!
What tools do you use and what evauluation methods do you use to determine:
a. The stocks you will invest in for CC
b. If you let the stock get called away or if you roll forward or if you sell at end of month?