A Safe Way to Play Potash Corp.

Potash (POT) had a huge run up on much better than expected earnings and big estimate increases.

New 2008 estimates are around $9.80 or better.

The shares hit an all-time high of $215.97 recently as momentum investors piled in at the top. Thursday the shares were back down to $176.50 [11:30 AM price] or just under 18x the new estimate.

If you are a believer but cautious about buying this volatile a stock after a major price surge, here's a lower risk way to think about.

Sell [write] January 2009 puts at a well below market price.

Here is a play that looks interesting if you think POT shares will not tank between now and January 16th.

Sell POT Jan. 2009 $120 put @ $9.50 /share

The breakeven for the $120 is [$120 - $9.50] = $109.50 thus you have a 37.96% cushion even if the shares retreat some more. If POT stays above $120 through expiration you make $940 per contract [assuming a $10 commission].

The maintenance margin requirement on each contract is approximately 20% of the net purchase price of $109.50 or $2,300. Your best case return [if the option expires] is to make $950 on that theoretical $2,300 tie-up of marginable equity.

Your worst case scenario is to end up buying 100 shares [per contract] of POT at a net price of $109.50 per share or about 11.2x this year's estimated earnings.
--seeking alpha