Theory to Practice

How to use a Process to Find Great Options Trade Ideas

Now you understand that the process to find Great Options Trade Ideas is not just about options. The process includes other elements like:

  1. Technical Analysis
  2. Fundamental Analysis
  3. Data Analysis

Let me show you an Options Trade Idea I gave to Winning Picks Premium Members. As you read it, I want you to notice a few things:

  • The UOA Tool spotted these trades almost 2 months prior to us getting involved.
  • I was relying on different Time Frames when analyzing the charts. You will see a short-term look and an 18-year look back.
  • While I use some fundamental analysis, you don't need an MBA from Harvard to find what we need.
  • I did go read the earnings transcript to allow the Company's management pitch me their story. 
  • I also found a small "nugget" in the Earnings Q&A session.
  • I used Google to find me some articles on the Food Crisis in 2007-08 to help me make sense of what happened then and how today differs.
  • The Technical Charts and the UOA gave me some ideas of a Target Stock Price I could use to get the right option from the New Options Chain.
Trade Idea Process

Here's the Options Trade Idea in MOS on January 10th, 2022... 

Theory to Practice

How to use a Process to Find Great Options Trade Ideas

Now you understand that the process to find Great Options Trade Ideas is not just about options. The process includes other elements like:

  1. Technical Analysis
  2. Fundamental Analysis
  3. Data Analysis

Let me show you an Options Trade Idea I gave to Winning Picks Premium Members. As you read it, I want you to notice a few things:

Trade Idea Process
  • The UOA Tool spotted these trades almost 2 months prior to us getting involved.
  • I was relying on different Time Frames when analyzing the charts. You will see a short-term look and an 18-year look back.
  • While I use some fundamental analysis, you don't need an MBA from Harvard to find what we need.
  • I did go read the earnings transcript to allow the Company's management pitch me their story. 
  • I also found a small "nugget" in the Earnings Q&A session.
  • I used Google to find me some articles on the Food Crisis in 2007-08 to help me make sense of what happened then and how today differs.
  • The Technical Charts and the UOA gave me some ideas of a Target Stock Price I could use to get the right option from the New Options Chain.

Here's the Options Trade Idea in MOS on January 10th, 2022... 

January 10, 2022

Trade Idea: MOS $40.18 (Mosaic Company)

Buy MOS June 17th $42 Calls for $3.40

TI MOS chart Winning Picks 011022

Mosaic is a provider of phosphate & potash fertilizers and feed ingredients for the global agriculture industry. Simply, they help farmers grow more food so we can eat.

Both phosphate and potash are experiencing tight markets that have pushed prices higher. And it’s not just with greater demand. Mosaic noted the following in their last earnings release:

“Supply disruptions and Chinese government rationing of energy and new export regulations threaten to further limit supplies of phosphates. Beyond 2021, the phosphate supply and demand balance are expected to remain tight as a result of low producer and channel inventories and limited supply additions, while lower than historical grain stocks-to-use ratio points to the need to increase crop production through fertilizer application.”
“[Potash] Inventories around the world remain below historical norms, especially in India and China, both of which will likely seek to establish 2022 contracts sooner than in recent years.”

Inventories

Inventories are relatively light around the world. Check out this chart on grain stocks-to-use ratio (yellow line):

TI MOS Stock vs usage chart Winning Picks 011022


You’ll notice that yellow line hasn’t been this low since the food crisis in 2007-2008.

Here’s how Mosaic management describes the situation today:

“Global agriculture market fundamentals remain attractive. With oil prices above $80 per barrel, increased demand for biofuels and renewable diesel are expected to push grain and oilseed demand higher.
China continues to be a large contributor to global demand for grain and oilseeds, buying record amounts of agricultural products to meet its domestic needs. China is rebuilding its hog herd, shifting to industrialization of its livestock industry, and continuing to use ethanol in fuel. All of this is expected to continue contributing to demand for grain and oilseed imports.”

Now, check out the MOS chart in 2006-2008…

TI MOS Food crisis chart Winning Picks 011022


Here’s what caused the 2007-2008 global food crisis:

“After reviewing the evidence, the study suggests the 2007/2008 food crisis was primarily driven by a combination of rising oil prices, a greater demand for biofuels and trade shocks in the food market. Rising oil prices led to increased costs of cereal production, as agriculture is generally an energy intensive enterprise. At the same time, there was increasing demand for cereal foods from wealthy oil-exporting countries. More importantly, higher energy prices increased the demand for biofuels, which became more competitively priced when compared with oil. In particular, this drove up the demand for biofuels derived from maize in the United States.”

History may not exactly repeat, but it rhymes.

Tesla Announcement

But tight markets and China hoarding may not even be the most exciting part of the story.

In October, Tesla announced that it would shift all its standard range vehicles to the Lithium Iron Phosphate (LFP) battery chemistry globally.

The MOS CEO then gave this answer to questions asked by Morgan Stanley and Goldman Sachs regarding China’s phosphate market:

“Now, we also see a long-term decline in production of phosphate fertilizers for agricultural use. That means that the phosphoric acid is starting to find its way into a lot of other industrial products, including these lithium-ion phosphate batteries, and a number of other areas. What we see is a declining production over time, and probably a restriction of availability into the phosphate fertilizer market. That means that over time, we should see a decrease of exports from China [implying higher prices].”

Essentially, we have a derivative EV play developing here.

The Trade

MOS is a cheap stock trading at a forward P/E near 8.

It has a strong balance sheet with a $1Bn buyback in place. In the earnings report, management announced the purchase of more than 956,000 shares at $35.72.

These two trades over the last 8 weeks raised my eyebrows:

  • November 12th: Buy 50,000 MOS March 18th $50-60 Call Spreads for $0.50 ($37.12)
  • December 22nd: Buy 30,000 MOS March 18th $50-60 Call Spreads for $0.48 ($38.74)

The $36 level in MOS seems to be an interesting pivot level going back 12 years.

TI MOS 18 yr chart Winning Picks 011022


It’s been resistance for the last 5 years. Notice, the prices being paid by the company and where our buyer came in to buy those Call Spreads.

The set-up (oil higher, supply shocks, China hoarding) makes the situation not unlike the food crisis we saw more than a decade ago. Add in the EV angle and you can see how it could gain momentum.

MOS has earnings in mid-February. I suspect this story needs time to develop and believe that the buyer of that Call Spread will roll out if he misses the timing.

I like the MOS June 17th $42 Calls for $3.40. The Target Stock Price is $55.

 

January 10, 2022

Trade Idea: MOS $40.18 

Buy June 17th $42 Calls for $3.40

TI MOS chart Winning Picks 011022

Mosaic is a provider of phosphate & potash fertilizers and feed ingredients for the global agriculture industry. Simply, they help farmers grow more food so we can eat.

Both phosphate and potash are experiencing tight markets that have pushed prices higher. And it’s not just with greater demand. Mosaic noted the following in their last earnings release:

“Supply disruptions and Chinese government rationing of energy and new export regulations threaten to further limit supplies of phosphates. Beyond 2021, the phosphate supply and demand balance are expected to remain tight as a result of low producer and channel inventories and limited supply additions, while lower than historical grain stocks-to-use ratio points to the need to increase crop production through fertilizer application.”
“[Potash] Inventories around the world remain below historical norms, especially in India and China, both of which will likely seek to establish 2022 contracts sooner than in recent years.”

Inventories

Inventories are relatively light around the world. Check out this chart on grain stocks-to-use ratio (yellow line):

TI MOS Stock vs usage chart Winning Picks 011022


You’ll notice that yellow line hasn’t been this low since the food crisis in 2007-2008.

Here’s how Mosaic management describes the situation today:

“Global agriculture market fundamentals remain attractive. With oil prices above $80 per barrel, increased demand for biofuels and renewable diesel are expected to push grain and oilseed demand higher.
China continues to be a large contributor to global demand for grain and oilseeds, buying record amounts of agricultural products to meet its domestic needs. China is rebuilding its hog herd, shifting to industrialization of its livestock industry, and continuing to use ethanol in fuel. All of this is expected to continue contributing to demand for grain and oilseed imports.”

Now, check out the MOS chart in 2006-2008…

TI MOS Food crisis chart Winning Picks 011022

Here’s what caused the 2007-2008 global food crisis:

“After reviewing the evidence, the study suggests the 2007/2008 food crisis was primarily driven by a combination of rising oil prices, a greater demand for biofuels and trade shocks in the food market. Rising oil prices led to increased costs of cereal production, as agriculture is generally an energy intensive enterprise. At the same time, there was increasing demand for cereal foods from wealthy oil-exporting countries. More importantly, higher energy prices increased the demand for biofuels, which became more competitively priced when compared with oil. In particular, this drove up the demand for biofuels derived from maize in the United States.”

History may not exactly repeat, but it rhymes.

Tesla Announcement

But tight markets and China hoarding may not even be the most exciting part of the story.

In October, Tesla announced that it would shift all its standard range vehicles to the Lithium Iron Phosphate (LFP) battery chemistry globally.

The MOS CEO then gave this answer to questions asked by Morgan Stanley and Goldman Sachs regarding China’s phosphate market:

“Now, we also see a long-term decline in production of phosphate fertilizers for agricultural use. That means that the phosphoric acid is starting to find its way into a lot of other industrial products, including these lithium-ion phosphate batteries, and a number of other areas. What we see is a declining production over time, and probably a restriction of availability into the phosphate fertilizer market. That means that over time, we should see a decrease of exports from China [implying higher prices].”

Essentially, we have a derivative EV play developing here.

The Trade

MOS is a cheap stock trading at a forward P/E near 8.

It has a strong balance sheet with a $1Bn buyback in place. In the earnings report, management announced the purchase of more than 956,000 shares at $35.72.

These two trades over the last 8 weeks raised my eyebrows:

  • November 12th: Buy 50,000 MOS March 18th $50-60 Call Spreads for $0.50 ($37.12)
  • December 22nd: Buy 30,000 MOS March 18th $50-60 Call Spreads for $0.48 ($38.74)

The $36 level in MOS seems to be an interesting pivot level going back 12 years.

TI MOS 18 yr chart Winning Picks 011022


It’s been resistance for the last 5 years. Notice, the prices being paid by the company and where our buyer came in to buy those Call Spreads.

The set-up (oil higher, supply shocks, China hoarding) makes the situation not unlike the food crisis we saw more than a decade ago.

Add in the EV angle and you can see how it could gain momentum.

MOS has earnings in mid-February. I suspect this story needs time to develop and believe that the buyer of that Call Spread will roll out if he misses the timing.

I like the MOS June 17th $42 Calls for $3.40. The Target Stock Price is $55.

 

And This is What Happened After the Trade...

TI MOS chart Winning Picks 011022 After the Trade

As you can see, not any one piece of the puzzle would get me in the trade. It was the combination of all the pieces that put together a story where the Risk-Reward seemed in out favor IF the stock started gaining momentum behind a food crisis or a TSLA product supply demand issue. 

There is nothing I did there that you couldn't do. The tools are built to wade through the millions of trades and help you find the exact ones we want to focus on. 

In the next lesson, I will start teaching you a valuable skill that will reward you in spades over time. In the meantime, make sure you get comfortable running around the tools even if you don't understand what's important just yet. We're just getting warmed up!

And This is What
Happened After the Trade...

TI MOS chart Winning Picks 011022 After the Trade

As you can see, not any one piece of the puzzle would get me in the trade.

It was the combination of all the pieces that put together a story where the Risk-Reward seemed in out favor IF the stock started gaining momentum behind a food crisis or a TSLA product supply demand issue. 

There is nothing I did there that you couldn't do.

The tools are built to wade through the millions of trades and help you find the exact ones we want to focus on. 

In the next lesson, I will start teaching you a valuable skill that will reward you in spades over time.

In the meantime, make sure you get comfortable running around the tools even if you don't understand what's important just yet. 

We're just getting warmed up!