Sponsored By:

Ivanhoe Mines (IVN)

March 03, 2009

Dear Fellow Option Traders,

Unusual trading activity in Ivanhoe Mines Ltd. (IVN) is too big to ignore. During the past several trading sessions, 25,000 of the March and June $5- and $7.50-strike call contracts have been purchased. Call open interest now stands at more than 56,000 contracts while puts are at just under 3,000.

IVN is an international mining company with a focus in Central Asia and the Asia-Pacific region. It is working on a copper and gold project in southern Mongolia called Oyu Tolgoi, which appears closer to receiving approval from the Mongolian government.

There have been issues centered on ownership sharing with the Mongolian government and project financing. It is likely that the extreme levels of call buying are associated with forthcoming news about this project. Of course, the unusual options flow could instead be signaling a catalyst that is entirely unknown to us at this time.

The recent call buying has driven implied volatility to about 158%. When reviewing the options on IVN, they seem expensive given reasonable expectations that one might have about future stock appreciation. Therefore, we believe that the odds of making money by buying the calls are not favorable at these prices.

Because of the price of the options, we recommend selling them and gaining upside exposure through stock ownership. When you buy shares of IVN for $4.45 and "sell to open" the June 5 Calls (IVNFA) for $1.20 or more, you effectively make your stock entry price $3.25.

If the stock declines between now and the June 20 expiration, you do not lose money until the stock drops below $3.25. If the stock is trading at or above $5 on the June expiration, it will mostly like be called away and you will have captured a 52% profit.

Just a note about this strategy: There are two primary disadvantages with covered call writing. One, your downside risk is only reduced, not eliminated. And two, your profit potential is limited. A covered call requires you to sell the stock at the option's strike price, regardless of how high the stock might have rise.

The major advantage of covered-call writing as an investment strategy is that it is far safer than just owning stocks or mutual funds. You generate an immediate cash return on your stock holdings, and the income (option premium) you receive offsets possible declines in the stock price.

Have a great day trading.


Nick Atkeson and Andrew Houghton
Editors
Options Trader