Trade Idea: Poor Man’s Covered Call in Cameco (CCJ)

poor-mans-covered-calls-cameco

After years in the doldrums, uranium has recently caught the attention of investors.

Last week uranium stalwart, Cameco (CCJ) pushed 24.2% higher, thanks to the overwhelming demand for not only the stock, but for call options as well.

Here is one example of how I would initiate a position in Cameco using a poor man’s covered call. Just remember, there are numerous ways to play Cameco, but my goal here is to teach everyone how to use poor man’s covered calls.

Cameco (CCJ)

Cameco (CCJ) is currently trading for 22.26.

Cameco-CCJ-stock-chart-september-2021

I choose my LEAPS call contract by the delta of the option. I prefer to initiate a LEAPS position by looking for a delta of 0.80. With a delta of 0.80, the January 20, 2023 15 call strike with 500 days until expiration works.

cameco-ccj-options-expiration-cycle-January-2023

I can buy one options contract, which is equivalent to 100 shares of CCJ, for roughly $9.20, if not slightly cheaper. Remember, always use a limit order, never buy at the ask price, which in this case is $9.40.

If we buy the 15 strike call for roughly $9.20 per contract, we are out $920, rather than the $2,226 I would spend for 100 shares of CCJ. That’s a savings on capital required of 58.7%. Now we can use the capital saved ($1,306) to work in other ways, preferably to diversify our poor man’s covered call strategy among other stocks and ETFs.

Once we make the initial LEAPS purchase, we can maintain that position and focus on selling near-term call premium against our LEAPS each month – thereby generating income and lowering the original cost basis with each transaction.

I begin the process of selling shorter-term calls against my LEAPS, by looking for an expiration cycle with around 30-60 days left until expiration and then aim for selling a strike with a delta ranging from 0.20 to 0.40, or a probability of success between 60% to 85%.

As you can see in the options chain below, the 25 strike call with a delta of 0.30 falls within my preferred range.

Cameco-CCJ-poor-mans-covered-calls-october-2021

I can sell the 25 call for roughly $0.70, or $70 per call contract.

My total outlay for the entire position now stands at $8.50. or $850 ($9.20 – $0.70). The premium collected is 7.6% over 38 days. That’s roughly 68.4% annually.

But remember, if we were to use a traditional covered call our capital outlay would be $2,226 and our return would be 3.1%.

Also, the 7.6%, or roughly 68.4% annually, is just the premium return, it does not include any increases in the LEAPS contract if the stock pushes higher. Since the initial delta of our position is 0.50 (0.80 – 0.30), the LEAPS contract will increase by $0.50 for every dollar CCJ moves higher.

The overall delta of the position will eventually hit a neutral state if CCJ continues to move higher over the next 38 days. If it does, we simply buy back our short call and sell more premium.

Delta is a major factor in managing poor man’s covered calls. I’m going to start going over the Greeks, including delta, theta and gamma soon. Stay tuned!

So, as you can see above, we have the potential to create 7.6% every 38 days, or approximately 68% a year using CCJ. This is our baseline and should be our expected return in premium, but again this does not include any capital gains from our LEAPS position if CCJ continues to trend higher.

As always, if you have any questions, please feel free to email me or post in the comments section below. And if you haven’t had a chance, please sign up for my free weekly newsletter where I offer options education, research, and trade ideas.

 

5 comments on “Trade Idea: Poor Man’s Covered Call in Cameco (CCJ)

  1. James Stewart on

    Hi Andy – thanks for the information. Can you provide some advice on what to do if the price tanks to (say) $10. I know stock selection is important and you should avoid stocks with a potential to do this but sometimes the market does the opposite to what you want. You are now sitting on a loss in the LEAP and if you sell the .30 Delta Call at this level you are restricting your upside if it does bounce back. In this scenario would you cut your losses and move on; or would you hold on to the LEAP and not sell the call until it does come back?

    Reply
    • Andy Crowder on

      James, thanks for the question. It is an important one and one that should not be ignored. I’ve written a few articles on risk-management and will be doing a few videos as well in the near future. As always, position-size is the most important aspect, followed by a strict guideline to stop loss. OF course, each individual with have their own level of not only position-size , but stop-loss as well, but there needs to be a concerted effort to both. I sounds easy, but emotions can takeover when losses start to occur, so have a plan in place prior to make each and every trade. I hope this helps and thanks again for the question.

      Reply
  2. Rob Black on

    One of the goals of LEAP strategies is to use Long Term options to take advantage of short term gains. Albeit short term gains over and over again. Some people like to adjust the LEAPs down if it goes against you in order to reap more premium with less risk of not being able to capture an upside move, while others like to just ride it out Long Term and keep selling premium until the underlying stock/ETF recovers. Keep in mind that often times investors will have more than one stock position that they are doing LEAPs with so that they are diversifying their risk across different sectors and stocks. It doesn’t really directly tell you what to do, but as Andy mentioned, each investor ends up with their own evaluation of which way to handle the situation fits best with their plan.

    Unfortunately I don’t think the chart shown above for CCJ is really the 1 month price chart. CCJ hasn’t been up around 40 or higher at all this past month, so I wouldn’t judge your position entry on that chart in this article. CCJ is currently in overbought territory with an RSI(14) about 82, and RSI(7) of 93, which means there could be a reasonable pullback, at which time it might make more sense for me to jump into the LEAP. Naturally, the call premium for the short term call is higher, anticipating a potential large move in the stock (delta and subsequently implied volatility ‘IV’).

    The example cleanly shows a covered call position on a LEAP, which was the intention, but I’m not sure if CCJ checks enough of the other boxes for a stock I’d want to own right now at the current price. If you pull up the 1 year chart, you’ll see that the stock is at a 52 week high and tends to pull back after a run up.

    All that being said, I’ve followed Andy’s many webinars and teachings for about 4 years now. I do greatly appreciate his realistic teaching style, not overselling (he leaves that to others), and desire for people to understand the principles he is basing his decisions on. He takes a mathematical long term practical and pragmatic approach, which suites my style very well. I’m glad to see that he’s continuing to provide his resources, experience, and insight to investors and traders alike.

    Reply
    • Andy Crowder on

      Rob,

      Thanks for the kind words. I purposely put up a longer-term chart, since I am trying to show the price history for CCJ, plus I am trying to show the potential of using CCJ as a longer-term hold. Agreed, we could see a pullback, but as we also know, overbought states can remain overbought for quite some time. Each has their own opinion, that’s what make a market. I truly appreciate your thoughts and again, thank you for the kind words.

      Reply
  3. Rob Black on

    Andy, you’re welcome. I didn’t realize this was a daily chart for the past 20ish years. Now the chart makes more sense when I look at it that way.

    Reply

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