Upside Speculation in Monsanto (MON)

As part of the thinking and learning process, I will try to capture as much as I can in option strategies. This lead me to Monsanto (MON) which have be hated by the market and everyone else including columnist at Barron's. We took position in this name around $70 to find it move one direction, down. At $55, I thought I'd take a cheap shot at this stock rebound through an out right Call option.

My goal is not to take delivery of the shares but plan to sell back the options at a (hopefully) higher price. This is because I don't have $6,250 to take delivery of the shares. Using options allow me to risk up front premium which I paid $50 for the right to buy MON anytime before June 18, 2010 at $62.50.

The breakdown
MON @ $55.50
$62.50 Call (June 10') => $0.50

Chart below shows the option data.

I have approximately 35 days for MON to rise 13%. This sounds like a tough task and it may very well be, but MON has fallen 18% over the same period going to 4/7. Roughly speaking, I expect the stock to retrace 60% of the decline. Chart below shows the macro view of MON.

The key to this trade is to consider all your premium to be worth nothing! That's correct, after placing this trade, I consider myself losing $50. If I regained that money back or profit, then I gained. My view is that the loss ($50) is minimal to the potential gain, I am willing to speculate.A quick technical look and you can see that RSI is at extreme oversold of 16.02. Then again, I said the samething to myself at RSI 20.
This trade should resolve much sooner than my previous strategy on QCOM so check back sooner than later - Art

Qualcomm (QCOM) at $38

I purchased Qualcomm today (4/23/10) at $38. In addition to owning the share out-right, I'd also would like to sell upside Call and downside Put around 20% out for July 16, 2010. Here is the breakdown

QCOM @ $38
$45 Call (July 10') => $0.18
$30 Put (July 10') => $0.28
Total proceed $0.46

I have created 1.21% of premium.
Here are the possible outcome.

Scenario 1 (stock rise 18% to $45)
This is an ideal scenario. Gain from stock is 18.42%. The stock gets "called" away and we are no longer own the stock. We get to keep the stock $0.46 premium and add that to our gain. Total gain is 19.63% in three months.

Scenario 2 (stock stay at $38)
For three months, the stock has done nothing. Given that the company doesn't pay any dividend, our gain is $0.46 from the premium we sold.

Scenario 3 (stock dropped 30% to $26.60)
This is bad. Because we sold the $30 Put, we have to buy shares when price fall below $30. Given that we bought at $38, our lost is 30%. We are forced to buy more shares at $30 and take an additional loss of 11%. Here is a little break down of the transaction:
Initial buy: $38 x 100 = $3,800
2nd buy prompted by options: $30 x 100 = $3,000
Total cost = $6,800
Since we collected $0.46 x 100 = $46 our cost is $6,754
We now own 200 shares at $26.60 = $5,320
Our loss is 21.23%

This illustration is an example of what could happen. We will look at at this strategy in July.