Options in Potash Telling Us Something?

12/12/2008 10:13 am EST

Focus: STOCKS

Nick Perry

Equity Options Trader, Schaeffer's Investment Research

Option players appear to be betting on a bounce in Potash Corp. of Saskatchewan (POT). Earlier today, we saw that shares of POT popped up on my daily option skew scan with more calls being bought than puts. This marks the third day in a row we have seen the stock pop up on the call side of that scan. A look to this intraday chart offers one reason why bulls may be getting riled up.


Chart Courtesy of Thomson Financial

Since hitting a low last Friday morning, shares of Potash have rallied roughly 45%. The sharp rebound combined with the call adds suggest that some think the rally still has legs. I am a bit more skeptical.

The reason I picked this intraday chart is that it also shows that the bounce from 48 to 70 was simply a reversal of the drop seen in the previous weeks. In other words, the stock appears to be just bouncing in a very wide range. A 45% rally in a week is tradable, but a look to the daily chart below shows it isn't enough to break the current downtrend.


Chart Courtesy of Thomson Financial

In a post last week, I revisited the idea of looking at Potash as a proxy for the willingness to take on risk. From that perspective, I would say that the recent bounce is a good sign that risk capital is being deployed. However, I don't think I would chase the stock on the long side. The call adds suggest optimism is a bit too high for this to be a good contrarian play right here.

By Nick Perry of Schaeffer’s Trading Floor Blog

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