Weakness in commodity prices has caused major fallout among agricultural stocks. Namely Potash of Saskatchewan (TSX: POT, Friday’s close $179.90) and Agrium Inc. (TSX: AGU, $83.20)

Given the fallout, it might be time to look at option strategies on companies whose share price may have corrected more than is justified by the fundamentals of the raw material fallout. Ideally, we want to take advantage of the high option premiums resulting from the sharp sell-off in the share price of the underlying companies.

One strategy is what I refer to as the double up double down trade. The idea is to buy shares of the underlying stock and write a longer term straddle. If the options are trading at high implied volatilities, the potential upside is close to 100% (on an annualized basis) representing the double up, while the downside, requires you to double down your position but at a much lower average cost.

In the case of AGU, you could buy say, 300 shares of the stock at $83.20 and write 3 January 80 calls at $13.50 along with 3 January 80 puts at $9.30. The total value of the premium received from the straddle is $22.80 per share.

On the initial purchase, your out-of-pocket cost is $60.40 ($83.20 purchase price less $22.80 premium = $60.40). If AGU is called away in January, the put will expire worthless and you will receive $80 per share for your long stock position. The return on the out-of-pocket cost is 32.45% over five months, or 77.8% annualized.

If AGU declines below the strike price of the put in January, your calls will expire worthless, and you will be required to buy an additional 300 shares at $80 per share (the strike price of the put). In this scenario, you will own 600 shares of stock, 300 shares at a cost of $60.40 plus 300 shares at a cost of $80. You average price for the 600 shares would be $70.20 ($60.40 + $80.00 divided by 2 = $70.20). If you are comfortable in a worst case scenario, owning AGU at an average cost of $70.20, then double your pleasure.

With POT, the numbers are similar. Look at buying 200 shares of the stock at $179.90 and writing 2 January 170 calls at $31.80 and 2 January 170 puts at $24.20. The total value of the premium received from the straddle is $56 per share.

On the initial purchase, your out-of-pocket cost is $123.90 ($179.90 purchase price less $56 premium = $123.90). If POT is called away in January, the put will expire worthless and you will receive $170 per share for your long stock position. The return on the out-of-pocket cost is 37.2% over five months, or 89.3% annualized.

If POT declines below the strike price of the put in January, your calls will expire worthless, and you will be required to buy an additional 200 shares at $170 per share (the strike price of the put). In this scenario, you will own 400 shares of stock, 200 shares at a cost of $146.95 plus 200 shares at a cost of $179.90. Your average price for the 400 shares would be $146.95 ($179.90 + $123.90 divided by 2 = $146.95). To execute this trade, you need to be comfortable, in the worst case scenario… owning POT at an average cost of $146.95.