Jim Rogers is Famous Investment Biker gives you investment advice.Some investors enjoy colorful careers. Jim Rogers would certainly be one of them. Rogers partnered with the legendary George Soros to co-found the Quantum Fund in 1970. Over the next 10 years, the fund gained 4,200%. In the same period, the S&P returned 47%.
After that, Rogers was wealthy and decided it was time for new challenges. As his web site explains one challenge,
“In 1990 Jim and his friend Tabitha set out to circle the globe on a pair of BMW motorcycles. Not simply to travel, but to learn about the worlds developing countries and investment markets by actually seeing them from the ground up.
It took twenty-two months, but together they drove 105,000 kilometers on land and traveled thousands more on sea, air, barge and rail links across six continents, setting a world record for land travel on the way.
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Investment Biker is the story of this amazing trip, and it’s about the world economy and society – who’s sinking and who’s swimming, which countries are on the rise and which are collapsing, where you can make a million and where you could lose one.
Every place he stopped in the trip, Rogers talked to businessmen, bankers, investors, and regular people, and learned reams of information that you’d never learn from reading the financial pages or any periodicals.”
His route covered the world.
His book distills the trip into important investment lessons. Among those is the idea to buy the biggest brewery in emerging markets, noting in his travels that people around the world enjoy beer. This could also be true in developed markets where brewers can deliver large gains.
A New High Could Signal More Gains
Boston Beer Co. (NYSE: SAM) is among the originators of craft beer in America. The stock has been volatile over the past few years.
Some analysts note the company founder, “brewer Jim Koch created what is easily one of the most competitive and diverse industries in the world. To that end, Boston Beer has suffered from stagnating revenues as the craft beer pie continually gets split up amongst more, and more, and more competitors.”
With the stock making new all time highs, the technical position is strong. This means it could be an excellent investment opportunity. However, the sharp move really could indicate a pullback is likely. An options strategy could provide a useful tool for investors who want to limit risk.
A Trade for Short Term Bulls
As with the ownership of any stock, buying SAM could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for SAM
For SAM, the August 17 options allow a trader to gain exposure to the stock.
An August 17 $340 call option can be bought for about $13.00 and the August 17 $350 call could be sold for about $8.00. This trade would cost $5.00 to open, or $500 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $500.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in SAM the maximum gain is $5.00 ($350 – $340 = $10.00; $10.00 – $5.00 = $5.00). This represents $500 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $500 to open this trade.
That is a potential gain of about 100% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
In this trade, options provide income and defined risk. These are the type of strategies that are explained and used in TradingTips.com’s Extreme Profits Calendar service. This service uses seasonals as one indicator in its trade selection process. To learn more about how options can be used to meet your goals, click here for details on Extreme Profits Calendar.