Options: Call-Spread Selling in Two Ags

We had interesting options action in two agricultural commodity names this morning right out of the gate. In Monsanto (MON Quote - Cramer on MON - Stock Picks) someone sold 5,500 May 95/105 call spreads for about $1.40, and in Potash (POT Quote - Cramer on POT - Stock Picks), there was a seller of 13,000 April 90/95 call spreads for around $1.05. Monsanto is a seed, herbicide and biotech giant with earnings due Thursday, April 2. The main business of Potash is, of course, potash, that mineral salt that contains potassium in a water-soluble form and is so crucial for crop fertilizer

Both of these trades occurred by 10 a.m. EST. With no real movement in the underlying stocks at the open, they tend to indicate large traders with clear intentions. Precisely what these intentions are, we can't be sure. But, as always, it pays to look at what the big money is doing in options and likely reasons why, especially when the stocks are quiet.

First, let's look at the fundamental news environment. We need go no further than "farmers' intentions" to get a handle on what investors might be up to. In the annual USDA report on 2009 planting intentions and quarterly stock data out this morning, the bottom line was that less corn will be planted this year. Some of that acreage will be replaced by soybeans since they cost about 30% less than corn to grow, and some will be idled.

However, since the value of the corn crop at $47 billion in 2008 was 1.7 times the size of the soybean crop, less corn equals less demand for seeds and fertilizer and this could hit sales at MON and POT.

The government report was not as bad as some were expecting, and making forecasts here is tough, with so many variables, but word is that farmers are feeling the pinch of paying more to grow crops with their prices falling

Citigroup threw in its 2-cents this morning by reducing 2009 estimates for both names.
Now let's look at what the call-spread sellers might be watching on an even shorter-term basis. Both MON and POT have had a great run off of the November-December lows. In fact, commodity names like these, along with technology, led the rally and did not make new lows in March with the rest of the market.

For investors who want to remain long these stocks into the spring planting and summer growing seasons, and who want to generate a little income while they consolidate some of their nice gains, selling upside call spreads seems like their kind of dish.

Whether we decide to follow trades like these at some point, looking at credit spreads is a great window on risk/reward in options trading. Volatility in both names is about average, consistent with the current environment, so another way to view the risk/reward is by using a probability calculator.

I used one at OptionsHouse.com that gave me this analysis: with MON at-the-money volatility of 56% for May options, there is about a 20% chance of the stock finishing above breakeven ($96.40) on the 95/105 call spread. And for POT, with ATM volatility of 78%, there is about a 24% chance of the stock ending above breakeven ($91.05) by April expiration on the 90/95 call spread. Let's see what we learn watching the agricultural commodity experts trade. .. thestreet/.com