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How to Trade Blown Up Uranium Stocks

Fear is Back

The news that has gripped equity markets this week has shifted from North Africa instability to the happenings in Japan. It makes sense-- Japan is the #3 country in the world in terms of economic strength, much larger relative to the region in which the uprisings have ocurred.

A Chain Reaction

Into the nuclear meltdown, fears have come up with respect to new nuclear prospects; China is reviewing all of its nuclear deployments, and the US and other developed nations will most likely follow suit. Because of this, we've seen Uranium prices collapse and Uranium stocks follow suit.

Everyone Just Calm Down

First, from a policy perspective, it makes sense to take a step back. We have a 40 year old, water cooled reactor that withstood (for the most part) a force of nature not accounted for in its building standards. Furthermore, if we take a look at the deaths per unit energy across multiple sources, we see that nuke has been one of the safest sources in recent history.

We will most likely see a dustup of nuke fears in the United States going forward, spearheaded by lobbying groups in coal-- so it's important to take a data-driven approach.

The Nuclear Market

Back to stocks: there's not many pure uranium plays out there. There's a smattering of ETFs but in terms of liquidity you should focus on CCJ. They have the most liquid stock and options board, so if you're going to look for a play, this is where it's going to be.

Over the past week, we've seen a big drop in the stock from 36 to 28, but we have also seen a double in implied volatility. That tells us that investors are forcing themselves into protection via options, and I think this is fadeable. Odds are we're not going to see any of these names retest their 52 week high anytime soon, so I'd look to sell vol.

The Trade Setup

One investor took a trade in USU that I think would carry over well in CCJ. USU is a small cap uranium play with low options liquidity, but it is an interesting trade. Essentially the trade is a call overwrite, in which one gets long the stock and short oversized calls. The trade is similar to a straddle sale, where it is a short volatility bet and makes money on a move higher but not an explosion.

So let's take a similar trade idea:

Buy 500 CCJ Shares @30.50

Sell -10 Sep 39 Calls @1.10

This is a moderately bullish trade that is short vega. Here's the expiration risk profile:

What's nice about this trade is that your directional exposure is pretty well covered, and if you do get a pullback, you can buy back the Sep calls you sold and roll them down.

But what is more important here is that you are short vega. That means if the implied volatility falls in the Sep contracts, you'll make money. Odds are if we get a slight bounce or any resolution, the premiums will lower, so even if you see no big movement in the stock, the calls will make you money.

Yup. Better than straight stock.

This particular trade is a crude one, and there are many other things you can do out in the market that make sense-- calendars, ratio sales, condors, etc. They all help you to take a moderately bullish thesis while managing your risk.

This event is why options make such great trading vehicles-- there are opinions investors cannot take strictly from trading stock, but with options you can take advantage of two sources of supply and demand: the price of the stock, and the premiums in the options. If this is all new to you, I've got a 17 hour video course at OptionFu that can help.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/