Jay's Corner: An Option Play To Consider

Bret Jensen

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We introduce a new feature today on The Biotech Maven. Going forward we will feature a few option ideas a week from options expert Jay Soloff, who is a friend and colleague of mine at Investors Alley. It will be part of our 'other voices' on the Maven and we will dub it Jay's Corner from now on.

Jays' Corner:

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By Jay Soloff,

With all the talk of renewable energy versus fossil fuels, it’s easy to forget we already have one of the most efficient power generating resources readily available to us.  Nuclear energy is not only incredibly effective, it also generates abundant power with zero emissions.

Of course, nuclear power has drawbacks.  The plants are extremely expensive to build.  Anything related to nuclear power becomes a national security issue.  Storing nuclear waste has always been a controversial topic.  And more than anything, high profile nuclear accidents have created a very negative stigma for the nuclear energy industry.

The negative aspects of using nuclear power may keep it from ever becoming the primary source of electricity generation in the world.  On the other hand, most existing nuclear power plants will continue to operate.  And there will be new plants built here and there.

In other words, there’s always going to be some demand for uranium, the element that is vital to creating nuclear fission. While the uranium market has stagnated in recent years, it also hasn’t shown any signs of collapse.  The price of uranium should remain stable (at the very least) for the foreseeable future.

If you’re an options trader, you know stability can be a very good thing for certain options strategies.  One strategy in particular which can thrive in a stable price environment is buy writing, known more commonly as writing covered calls.

For utilizing covered calls, we first need an underlying asset which tracks uranium prices closely.  Since the actual uranium market is not widely accessible to investors, the easiest way to trade uranium is through the proxy of Cameco(CCJ), the world’s largest uranium producer.  CCJ tends to track the price of uranium very closely.

Covered call writers are certainly familiar with CCJ.  In fact, a very covered call large trade occurred just this week.  A trader sold 8,000 CCJ January 2019 calls at the 11 strike for $1.05.  This was done versus 800,000 shares of stock at $10.64 per share.  Keep in mind, a covered call involves being long the stock and short 1 call for every 100 shares of stock you own.

While the max gain for this trade is capped with the stock at $11, the trader will earn a 10% yield on the trade from the calls alone… even if the stock stays above the strike price.  The trade also protects down to $9.95 due to the $1.05 premium collected ($840,000).  All told, at $11 or above, the trade can generate 13% in under 6 months.  (That doesn’t include the yield from the dividend, but CCJ’s dividend is very small.)

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Still, the beauty of this trade is not the upside in the stock but the very juicy call you can sell.  Due to the built in global demand for uranium, CCJ will likely remain range-bound for the time being.  You can see form the chart, it hasn’t been below $10 since April.  For the year prior to April, the stock has basically held above $9 – so very limited downside overall.

Normally, when you find a stock that has a pretty clear floor, there isn’t enough premium in the covered calls to make them worth selling.  That’s especially true when the stock is around $10.  The fact you can get CCJ for the current price and sell an at-the-money call for over $1 is uncommon.  And even better, this trade can generate an annualized return of over 20%.  For those of you who enjoy trading covered calls, this is a trade you shouldn’t pass up.

New Free Report Available: Jay recently published a free report entitled '10 Simple Rules To Trade Options Like A Pro' for those that want to learn more about profitably adding options strategies to their investing 'toolbox' including Buy-Writes on many of the small caps we cover in our '4 Hot Analyst Reads' before the market open every trading day, it is now available free via download HERE.


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