Thanks to the rise of cryptocurrencies, uranium specialist Cameco (CCJ) offers an enticing long-term bullish opportunity. After all, blockchain mining consumes an enormous amount of energy. Therefore, it’s likely not possible to ignore the nuclear fuel industry. At the same time, the volatility in CCJ stock warrants consideration of a unique options strategy called the Long Iron Condor.
Unlike many other strategies that involve a directional wager, the Long Iron Condor represents a wager on rising implied volatility (IV), or the market’s expectation of an asset’s move. Stated differently, the buyer of this particular condor trade doesn’t care whether the target security moves higher or lower. Rather, the idea is for the asset to move enough to reach the upper or lower profitability zones.
To reiterate, I am bullish on CCJ stock in the long term. However, the present chaotic nature of Cameco suggests that a directional wager could be a fool’s errand. Quite frankly, I have no idea whether the next several sessions will be net positive or negative. Instead, I’m confident that the movement itself will be robust. Such a circumstance is where the Long Iron Condor shines.
One of the more advanced multi-leg options strategies, the Long Iron Condor represents the combination of a bull call spread and a bear put spread. Each of these vertical spreads is a directional wager. For the former, traders buy a call and simultaneously sell a call at a higher strike price. The idea here is to use the credit received from the sale of the short call to help offset the debit paid for the long call.
On the other end, the bear put spread represents the opposite directional framework. The trader buys a put and simultaneously sells a put at a lower strike price. By logical deduction, the goal is to use the credit received from the sale of the short put to partially offset the debit paid for the long put. By combining these two vertical spreads, the trader doesn’t care about direction but rather the size of the move.
Naturally, then, for the buyer of the Long Iron Condor, the worst thing that can happen is for the security to stay relatively flat. It’s helpful to think of this condor strategy as an American football game with a north and south endzone. You’re trying to drive the ball into either endzone for the win.
Given the stratospheric popularity of digital assets, the crypto ecosystem likely isn’t going anywhere anytime soon. This backdrop should keep the lights on for CCJ stock. At the same time, broader headwinds — such as the real possibility of inflation storming back in 2025 — appear to have cut into enthusiasm for Cameco.
From a technical analysis standpoint, it’s possible that CCJ stock is charting what appears to be a broadening top formation, also known as a megaphone pattern. These chart formations are notoriously difficult to predict from a directional standpoint. However, their appearance signals a higher likelihood of rising IV. Wherever the target asset goes, it will likely do so with fervor.
Since we’re confident about volatility rather than direction, the Long Iron Condor makes sense. As a downside target, CCJ stock dropping down to around $48 wouldn’t be out of the question, as this is where its 200-day moving average sits. On the top end, a pushback toward the $60 level also wouldn’t be surprising. With these price targets in mind, we can set out to find an appropriate Long Iron Condor.
Of course, it goes without saying that if all other things were equal, traders would prefer buying “narrow” Long Iron Condors. Such trades would feature a lower threshold to either the upper or lower endzone. However, narrow long condors offer low probabilistic risk for relatively high positional risk and, subsequently, low payouts. On the flip side, wider condors offer low positional risk and high payout but at the expense of high probabilistic risk.
Because condors involve four legs or strike prices, it’s important to find a trade where the stock could potentially either rise to the short call strike price (the highest strike) or fall to the short put strike (the lowest strike). Generally speaking, it’s better to avoid biasing heavily to one side or the other. That’s because you’re paying a premium to “attack” both endzones. If you are confident directionally, you should buy a vertical spread instead of a condor.
Finally, it’s important to consider the time to expiration. Sellers of iron condors benefit from time decay because there’s less time for the trade to be in the money. Buyers pay a premium for time. So, keep in mind that options chains further out in the calendar will feature greater premiums.
Turning to Wall Street, CCJ stock has a Strong Buy consensus rating based on 10 Buys assigned in the past three months. Furthermore, the average CCJ price target is $60.65 per share, implying 13.9% upside potential.
Thanks to the stunning rise of crypto, the nuclear energy industry should benefit from longstanding relevance. Theoretically, this dynamic should bolster Cameco’s business. However, in the immediate frame, CCJ stock appears to be forming a broadening formation, which suggests rising volatility. If so, a special options strategy called the Long Iron Condor could be appropriate.
Unlike directional wagers, a Long Iron Condor becomes profitable on the magnitude of movement. As a combination of a bull call spread and bear put spread, the trader doesn’t care where the target security moves to, so long as it does so with conviction. That said, it’s important to consider a condor with a reasonable probability of hitting either profit zone due to the “double” premium paid.
This article was originally published here.
