Uranium producer Cameco Corp CCJ has encountered volatility in recent sessions thanks to opposing fundamental forces tugging on its shares.
On one hand, the stunning rise of cryptocurrencies implies greater energy consumption from blockchain mining. Cynically, this framework should be net positive for Cameco stock and the broader nuclear energy industry.
On the other hand, elements such as geopolitical tensions and an overall sense of economic uncertainty have also applied downward pressure on Cameco and other uranium producers recently.
Therefore, attempting to guess where the company’s stock may head next appears futile. Instead, it may be better to assume that wherever Cameco goes, it will do so with zest.
Currently, the security’s price chart shows a broadening formation, also known as a megaphone pattern. Essentially, the price action is charting both a series of higher highs on the upswings and lower lows on the downswing.
This formation is notoriously difficult to trade as a directional play. However, the underlying rise in volatility offers an attractive opportunity for a long iron condor.
Focusing On Volatility Rather Than Direction
Structurally, the long iron condor is a combination of two vertical spreads: a bear put spread and a bull call spread. In the former strategy’s case, the idea is to buy a put and simultaneously sell a put (of the same expiration date) at a lower strike price. Should the security drop below the short put strike price, the trader collects the full reward.
By logical deduction, the opposite applies for the latter strategy. The idea is to buy a call and simultaneously sell a call at a higher strike price. Should the security rise above the short call strike, the trader fully wins. Partial wins are also achieved for these individual vertical spreads if the security breaches the breakeven threshold.
Since the long iron condor combines the bear put and bull call spreads, traders don’t care what direction the target security moves to. Rather, the focus is on the magnitude of movement. That’s why traders who anticipate a rise in implied volatility often deploy a long iron condor. To put it simply, kinesis is this option strategy’s best friend, while stasis is its enemy.
Hunting For The Right Condor
Since the long iron condor trader profits from rising volatility, all other things being equal, the “narrowest” condors would make the most sense. After all, such structures would easily allow the target security to rise above or fall below the outer strike prices. However, narrow long iron condors generally feature high positional risk (i.e. big money at risk for a small payout) in exchange for the high likelihood of profitability.
On the other side of the table, wider long iron condors tempt traders with typically low positional risk (i.e. less money at risk for a big payout) in exchange for the low likelihood of profitability. Such strategies tend to be speculation traps due to the improbability of making money.
Therefore, trying to find the balance between risk and reward is key with any multi-leg options strategy, especially the condor. That said, one possible idea to consider is the 52P | 54P || 58C | 60C condor for the options chain expiring Dec. 27, 2024. This is how the trade breaks down individually:
- Sell the $52 put.
- Buy the $54 put.
- Buy the $58 call.
- Sell the $60 call.
Cameco stock, at last check, would need to rise roughly 10% to break above the $60 call strike. On the flipside, CCJ could also drop a little less than 5% to break below the $52 put strike.
Given the security’s wild undulations, either outcome is within the realm of possibility (and arguably within the realm of probability).
Further, because CCJ appears to be suffering a bearish bout, the downside target may be more achievable. However, if bullish momentum materializes, traders enjoy decent “coverage” to the upside as well.
Finally, even if traders don’t like the 52P | 54P || 58C | 60C condor expiring Dec. 27, the broadening pattern of CCJ stock suggests future volatility-based opportunities. So, keep close tabs on Cameco.
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Image courtesy of Cameco
Overview Rating:
Speculative
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