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Pop Goes Cameco

Jason Ayres
October 30, 2013
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6 minutes read
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Today’s market open revealed a boost in activity on Cameco (CCO-TC) option contracts. So far this morning all of the action seems to be favoring the call side.

As always, I will stress the importance of understanding that this does not suggest a specific directional bias as options are used to meet a number or investor objectives. That being said, call side premiums have experienced an attractive appreciation in value at a number of strikes and expiration dates driven by the better than expected earnings report released before the market opened.

According to MarketWatch, here are the highlights:

  • Strong third quarter and year-to-date results – higher revenue, gross profit and net earnings
  • Higher sales volumes and average realized prices in our uranium and fuel services segments
  • Reconfirmed annual sales guidance
  • At Cigar Lake began jet boring in waste rock
  • We were granted 10-year operating licenses at McArthur River, Key Lake and Rabbit Lake
  • Delivered our first shipments of Canadian uranium to China under the new Canada-China Nuclear Co-operation Agreement

Back on June 24th, I wrote a blog entitled A Case For Cameco. At the time, the shares were trading at $21.40. Clearly shares have been very much range bound since then however the company fundamentals and industry considerations highlighted in that previous blog are still relevant today and the jump on earnings this morning suggest that investors are so far “buying” the story.

I have indicated in many blogs that I am very much a technical trader. I believe that if the growth projections and fundamentals of a company hold water, then the price action will confirm the outlook. Regardless of whether the projections prove right or wrong over the long run, we profit from the price action and if the market participants are buying it, that’s the direction to follow.

Below is a weekly chart of CCO-TC as it trades presently. If you compare it to the one that I included in the blog linked above, you see that not a lot has happened from a price advance perspective. However, the shares held support very well and that indicates an interest in owning shares with in this range. Traditionally, investors will only buy shares if they have an expectation of selling them at a higher price. In other words, the consideration is that the stock may be under valued here.

cco_oct30

The strategy that I highlighted in the June 24th blog A Case For Comeco is still relevant for a longer term opportunity (although prices will be different). Today, I want to review a shorter term idea.

For the active trader that wants to take advantage of a shorter term momentum play, buying a 3-4 month at-the-money call would be an ideal approach. While the market is likely being a little greedy given the pop in the stock this morning, a limit order may shave a few dollars off of the cost in the event of a late day pull back in shares. Regardless, for the sake of a few dollars, it is sometimes best just to take action rather than risking a lost opportunity by not getting filled.

By purchasing calls, your maximum risk between now and expiration is limited to the premium. In full disclosure, I will only allow an option contract to depreciate by 50% before I cut my losses. Usually at that point you are either wrong on the direction of the stock or running out of time.

Assuming a near term target of $25.00/share, an at-the-money call would build in an attractive intrinsic value. The real value of the contract would be dependent on how much time is left until expiration at the point that the stock hits the target. Regardless, the minimum value of the option should be in the range of its intrinsic value

With this in mind, we have created a trade with an asymmetrical risk/reward potential. In basic terms, the profit potential exceeds the maximum risk exposure. This idea has everything we would look for in a potential trade opportunity

  • Good momentum due to fundamental news
  • Technicals analysis supports the directional bias
  • Limited risk exposure
  • Unlimited profit potential
  • A simple strategy for easy management

Of course we deal in a business of probabilities and there is always the risk of being wrong so take action at your discretion and manage your position accordingly.

Jason Ayres
Jason Ayres http://www.croftgroup.com/

CEO and Director of Business Development

R.N. Croft Financial Group

Jason is CEO and Director of Business Development at R N Croft Financial Group, a member of the Croft Investment Review Committee and a Derivative Market Specialist by designation. In addition, he is an educational consultant for Learn-To-Trade.com and an instructor for the TMX Montreal Exchange.

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