Uranium miners, like Cameco (CCJ), have fallen around 35 percent amidst the Japanese nuclear crisis. Mining companies did deserve to drop from their recent lofty highs but is the drop overdone? I really don’t know the answer for sure, but I’m willing to take a calculated risk.
The situation is too fluid to take a very bullish or bearish stance on CCJ right now. As I looked to structure a trade today, I started with the recent spike in implied volatility in the near-term options. Implied volatility in front month options has more than doubled in the last ten days and is sitting above 60 percent now. This has resulted in very high option prices in April. I would like to sell this volatility as it will eventually subside and come back to more normal levels around 30-35 percent.
Like most of us in this community, I like to trade the same tickers over and over and have traded CCJ for some time. My hunch is the drop in CCJ was excessive and the stock is unlikely to drop much more. An article I read in Barrons.com a few days ago agrees with my analysis,
“However, it is unlikely that any longer-term consequences will be severe enough to warrant the size of today’s selloff in uranium miners,” said the Barrons.com article. “It’s not surprising that the names have come under intense pressure, but we think patient investors will likely be rewarded by buying on the dip.”
Technically the stock is oversold with RSI reading as low as 14.9 yesterday and being below its 200 SMA at $31.70. Short-term resistance is at $33 and short-term support may be $26.50, which used to be resistance back in August and September of last year.
Next, I looked to my trading plan to see which type of strategy will make sense given my expectation for profit. With the unpredictable nature of Japan’s condition, I decided to start with a conservative strategy that will allow me to make up to 3 to 4 percent a month even if the stock fell another 12 percent from here.
I executed an ITM Covered Call on CCJ Friday and sold the extremely high volatility in the front month. In this type of trade structure I’ll make money if CCJ stays above $26.10 per share. Now that I have a trade setup I’m happy with, I need to focus on developing an exit plan. The central idea will be to figure out my future actions if my analysis is wrong and the stock continues to plummet. My plan is now in place and if CCJ drops more than 10 percent from here I’ll begin to execute the plan.
This is an easy, relaxed approach to making consistent profits in the market. If CCJ drops 5 percent tomorrow I don’t have to sit and watch the stock all day because I have a nice cushion against stock price drops. What is more, I have a plan to handle drops in excess of 12 percent.