Shares in Uranium Participation Corp are trading at a discount
Uranium Participation Corporation (Symbol U on the TSX exchange) is a company that invests in uranium.
Uranium presents an attractive investment opportunity at this time. The commodity itself is currently trading at below the cost of production for most miners, a situation that cannot continue indefinitely. Eventually companies will be forced to curtail production, and this will send the price of uranium higher.
Uranium is a restricted commodity so it cannot be owned by non-authorized participants. Given that many uranium mining companies are having difficulty earning profits at the current market price for uranium, a more attractive method of playing for a rebound in this industry could be to buy call options on Uranium Participation Corp.
The price of Uranium Participation Corp shares has fallen over the past few months.
CHART 1:
Share price of Uranium Participation Corp (TSX:U)
Source: Bloomberg
The majority of this decline has been the result of an increase in the discount to NAV (net asset value). Net asset value (NAV) is the value of an entity’s assets minus the value of its liabilities, often in relation to open-end or mutual funds, since shares of such funds registered with the U.S. Securities and Exchange Commission are redeemed at their net asset value. Closed-end funds trading in the open market can trade at a discount or premium to their NAV.
CHART 2:
Discount to Net Asset Value (TSX:U)
Source: Bloomberg
On January 31, 2020 the April $4 call is offered at $0.20 per contract.
TABLE 1:
Speculating on a change in sentiment in the Uranium sector
Source: Big Picture Trading
Even a simple return to NAV (last reported price of $4.25 at year end) would result in the option call being profitable.
However, if uranium were to rally and sentiment within the sector to shift, it would be easy to envision uranium rallying 10%. At that point, the discount might even shift back to a premium (as seen in 2018).
A 10% increase NAV would equate to $4.675/share and a shift back to a 5% premium, could see the price of Uranium Participation Corporation shares trading at $4.91.
Risking $0.20 to potentially earn $0.71 is an attractive investment opportunity.
TABLE 2
Potential Outcomes at Expiry
Source: Big Picture Trading
Rarely do such deep value situations present themselves in the options market.
Disclaimer:
The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.
Derivatives Market Specialist
Big Picture Trading Inc.
Patrick Ceresna is the founder and Chief Derivative Market Strategist at Big Picture Trading and the co-host of both the MacroVoices and the Market Huddle podcasts. Patrick is a Chartered Market Technician, Derivative Market Specialist and Canadian Investment Manager by designation. In addition to his role at Big Picture Trading, Patrick is an instructor on derivatives for the TMX Montreal Exchange, educating investors and investment professionals across Canada about the many valuable uses of options in their investment portfolios.. Patrick specializes in analyzing the global macro market conditions and translating them into actionable investment and trading opportunities. With his specialization in technical analysis, he bridges important macro themes to produce actionable trade ideas. With his expertise in options trading, he seeks to create asymmetric opportunities that leverage returns, while managing/defining risk and or generating consistent enhanced income. Patrick has designed and actively teaches Big Picture Trading's Technical, Options, Trading and Macro Masters Programs while providing the content for the members in regards to daily live market analytic webinars, alert services and model portfolios.
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