Cameco (NYSE: CCJ) and other uranium stocks recently experienced a notable surge. The catalyst? A report suggesting that Kazatomprom, the world’s largest producer of uranium, will slash its uranium production target for 2025 by 17%, bringing it down to a range between 25,000 to 26,500 metric tons. Moreover, Kazatomprom hinted that even this reduced target could be overly optimistic, raising concerns about a potential global uranium shortage.
For Cameco, which plays a critical role in the uranium supply chain, this news has had a positive effect. The prospect of a supply shortage lifted CCJ stock. However, with the market’s attention firmly fixed on these developments, there’s a strong possibility that the good news is already priced into the stock. Additionally, on the technical front, Cameco printed a doji star pattern on Friday, suggesting a possible reversal after a bullish run.
In situations like this, where the stock could move sideways despite the fundamentals supporting it, a bull put spread provides a potentially effective strategy. It allows traders to collect premium from selling a put option while hedging their downside exposure through a purchased put option.
Implementing the Bull Put Spread
For those who believe Cameco can hold steady but not necessarily rise much higher, consider the following bull put spread strategy:
- Sell the AUG 30 ’24 $41 put at a bid price of 34 cents
- Buy the AUG 30 ’24 $40.50 put at an ask price of 28 cents
- This trade generates a net credit of 6 cents per share, or $6 per contract.
Here are the key stats:
- Maximum Profit: $6 per contract
- Maximum Loss: $44 per contract
- Breakeven Price: $40.94
- Risk/Reward Ratio: 7.33 to 1
How the Strategy Works
In this bull put spread, you’re selling the $41 put option, which gives you the obligation to buy CCJ stock at $41 if the stock falls below that price by expiration. To hedge your risk, you’re simultaneously buying the $40.50 put option, limiting your downside exposure to $40.50.
The maximum profit of $6 per contract is achieved if Cameco remains at or above $41 per share by the expiration date. On the other hand, your maximum loss is capped at $44 per contract if Cameco closes below $40.50 per share. Given the relatively low premium collected, this is a high-risk, low-reward trade, but it could work well in scenarios where the stock is expected to move sideways or hold steady above a key support level.
Technical Analysis: Support Levels and Volatility
From a technical perspective, Cameco’s $41 price level has proven to be a strong support line, holding firm since late last year. This makes the chosen strike prices for the bull put spread particularly relevant; so long as CCJ doesn’t break below this support, the trade can be profitable.
However, traders should be cautious. The doji star pattern that printed on Friday following a bullish rally suggests a potential reversal may be in play. Typically, this pattern indicates indecision in the market and can precede a downturn. Nevertheless, the fundamentally positive outlook regarding uranium supply could temper the negative implications of this pattern, leading to a sideways movement.
Another consideration for this trade is volatility. The implied volatility for the options expiring on August 30, 2024, sits at 41.82%, whereas the historical volatility is significantly higher at 53.27%. This disparity suggests that the options market may be underpricing the potential for volatility. While that increases the risk for those selling options, it could also indicate that traders are anticipating stability in Cameco’s stock price — a scenario well-suited for a bull put spread.
Disclaimer:
Stock trading involves significant risks and is not suitable for every investor. The strategies and ideas discussed in this article are for informational and educational purposes only and should not be construed as financial or investment advice. Always conduct your own research or consult with a licensed financial advisor before making any investment decisions.
Please note that selling options can expose you to unlimited liability if the underlying asset moves against you. It is crucial to exercise your in-the-money bought options to offset the potential liability of your in-the-money sold options, particularly in volatile markets. Make sure you fully understand the risks and mechanics of options trading before engaging in these types of transactions.
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