Recommendation No. 1: Monsanto (NYSE: MON)

“Sell to Open” Monsanto July $77.50 Call

Option Symbol: MON120721C77.5

Limit Order Price: $3.70 or more

Directional View for Underlying Stock: Neutral

Personal Finance Portfolio: Growth

• Income generated: $370 per options contract (representing 100 shares of stock)
• 92-day rate of return at current stock price of $76.70: 4.8 percent (19.1 percent annualized)
• Tell your broker:

“I want to sell a covered call against 100 shares of my Monsanto (MON) stock. Specifically, I want to ‘sell to open’ one July $77.50 call for a credit of $3.70 per share or more.”

• Remember: You should only sell one call option per 100 shares of stock purchased. The trade can only be done in 100-share increments (100, 200, 300, 400, 500, etc.).

Alternative Trade for Those Who Don’t Already Own Monsanto:

Buy/Write on Monsanto (NYSE: MON): Buy the Stock and Simultaneously “Sell to Open” the July $77.50 Call

Option Symbol: MON120721C77.5

Limit Order Price: $73.00 or less (stock is at $76.70 and July $77.50 call is at $3.70)

Directional View for Underlying Stock: Neutral

Personal Finance Portfolio: Growth

• Net cost of buy/write: $7,300 per 100 shares
• 92-day return if stock does not move: 4.8 percent (19.1 percent annualized)
• Brokers vary as to whether they call this trade a “buy/write” or a “covered stock” trade.
• Do the trade simultaneously at a single limit price, if possible. For example, if you want to buy 100 shares of stock, tell your broker:

“I want to do a buy/write trade. Specifically, I want to buy 100 shares of Monsanto (MON) and ‘sell to open’ one July $77.50 call for a net debit of $73.00 per share or less.”

• Some brokers require that you buy the stock and sell the call in separate trades. If your broker is one of these, always buy the stock first and sell the call against it second:

Trade No. 1:

“I want to buy 100 shares of Monsanto (MON) for $76.70 per share or less.”

Trade No. 2:

“I want to sell a covered call against 100 shares of my Monsanto (MON) stock. Specifically, I want to ‘sell to open’ one July $77.50 call for a credit of $3.70 per share or more.”

• Ex-Dividend Date: The stock’s next quarterly ex-dividend date is around July 3rd. Since this ex-dividend date is very close to July options expiration, the time value associated with the July $77.50 call may not be larger than the $0.30 quarterly dividend on the ex-dividend date. Consequently, if the $77.50 is “in the money” at the start of July there is a chance that the call will be exercised early to capture the dividend. We will monitor the situation and recommend an early roll of the call to a later expiration month if necessary to avoid options assignment.
• Why the July $77.50 Strike?:  According to Personal Finance lead advisor Elliott Gue, the world’s biggest seed company beat analyst expectations in its second-quarter financial report partly due to unseasonably warm weather and early shipments of corn seed. Front-loaded sales make future sales a bit precarious to predict, but the good news is that the company raised its full-year earnings guidance. Still, the company said that the raised guidance was based on the already-completed first six months of the fiscal year; earnings in the second half of the year would be flat as compared to the previous year. If the front-loading of first-quarter sales takes away from sales in future quarters, it may make it difficult for the stock to rise much above its current price of $76.70 in the next three months. The first strike price above its current price is $77.50.

Price Adjustments Regarding This Trade

Stock prices are currently fluctuating and option prices fluctuate with them. Consequently, the limit prices recommended in this trade may no longer be immediately fillable by the time the alert has been released. The alerts are valid for seven trading days, so be patient and place your limit orders as “good ‘til cancelled” for seven trading days.

Investment Rationale for Underlying Stock:                           

A leading producer of genetically modified (GM) seeds, Monsanto (NYSE: MON) reported in early April that it beat expectations for its fiscal 2012 second quarter due to strong sales, a performance driven by the unusually warm winter.

Revenue for the quarter totaled $4.7 billion, beating analysts’ expectations by 4.8 percent. Sales increased 15 percent from $4.1 billion in the prior year’s quarter. Earnings rose 19 percent to $1.2 billion, equating to a 25.5 percent profit margin.

Sales increased in the company’s three top businesses: corn, soybeans and agricultural productivity (herbicides). Corn seed sales rose 16.6 percent to $2.8 billion and soybean seed sales also grew by 12 percent to $689 million.

This increased revenue was propelled by early shipments of corn seed, as US farmers began planting earlier in the year. US farmers are projected to plant 95.8 million acres of corn this year to take advantage of high prices, representing a 4.3 percent increase from last year–the most total acreage since 1937.

It’s difficult to predict how these early sales in the second quarter will affect the rest of the year. However, it did not stop Monsanto from raising its earnings outlook for the year to $3.45 to $3.50 per share from $3.39 to $3.44 per share.

Monsanto’s GM seeds are designed to exhibit beneficial traits such as resistance to common crop pests and popular herbicides. In 2010, the company’s aggressive pricing of GM seeds resulted in lost market share and damaged relationships with major customers.

But the company quickly recognized its strategic missteps and revised its US pricing strategy for its second-generation seeds and genomics. These moves dramatically boosted volume and profitability in the US market. Not only did US farmers plant Monsanto’s Reduced-Refuge corn product lines on approximately 10 million more acres in 2011 than in 2010, but they also sowed more than 17 million acres–an increase of roughly 10 million acres–with Roundup Ready 2 Yield soybean seeds. Management says these products are on course to expand by a further 10 million acres by the end of 2012.

A few broader market trends continue to help Monsanto. First, the prices of soybeans, corn and other key crops remain elevated, while supplies of some foodstuffs remain tight. That means farmers’ incomes are high and growers have a strong incentive to boost their harvests.

Genetically modified seeds boost crop yields and Monsanto’s innovative products are gaining share in most major markets. The up-and-coming Latin American market also offers ample opportunities for growth, as farmers plant more acreage and upgrade to second-generation seeds. Controlling approximately 40 percent of the Brazilian market and about 50 percent of the Argentinean corn market, Monsanto has a built-in advantage over the competition.

In Brazil, 77 percent of the country’s corn acres will be planted with next-generation GM traits in 2012, compared to just 64 percent last year and less than 50 percent in 2010. In neighboring Argentina, 89 percent of the corn will be grown from GM seeds with double- or triple-stacked traits, up from 74 percent the previous year.

Monsanto also has an attractive pipeline of products that are in late-stage development or due for launch. The list includes a new line of mildew-resistant cucumbers, drought-tolerant cotton, and soybeans with advanced protection against insects. Monsanto rates a buy below 85 in the Personal Finance Growth Portfolio.