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.
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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) is currently trading for 22.26.
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.
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.
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 newsletter where I offer options education, research, and trade ideas.