It has been more than three years since the Fukushima nuclear power plant was crippled by a tsunami, spewing radioactive material into the environment. Similar to the way in which nuclear radiation lingers for an extended time, the financial and political effects of the disaster continue to affect nuclear power generation across the world.
Shortly after the Fukushima disaster, the Japanese government made the decision to shut down its 50 remaining nuclear power plants, with Germany following suit and committing to accelerate its decommissioning of nuclear power generation. Even China got in on the act, demanding an accurate account from Japan so it could apply the disaster's lessons to its own nuclear power initiatives.
With so much talk of reducing nuclear power generation, demand for uranium has been on the downswing. This has pressured profit margins for companies that produce uranium.
But we may now be at the point where sentiment has reached its ultimate low. Prospects for uranium demand are starting to improve. China in particular should help drive demand for uranium as the country continues to build out its nuclear power program. In fact, there are several state-owned nuclear companies that are gearing up for initial public offerings to raise capital for construction.
This is good news for the world's largest uranium producer, Cameco (NYSE: CCJ), which provides roughly 14% of the world's annual uranium supply.
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CCJ sold off sharply in the wake of the Fukushima disaster as prospects for its uranium business looked bleak. But, as is often the case when an industry's challenges are fully discounted, investors appear to have finished selling and the stock has recently begun to rally. As investor sentiment improves, I expect a continued rebound due to the company's deep uranium reserves and increasing production.
The uncertainty surrounding CCJ works to our favor as put sellers, as higher levels of perceived risk lead to larger option premiums.
Today, we can sell the CCJ June 23 puts near $0.95. By doing so, we are accepting the obligation to buy 100 shares of CCJ per contract at the $23 strike price if the stock is trading below this level when the puts expire on June 20.
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It is important to keep in mind that if we are assigned shares, we will be purchasing the stock at a material discount to today's prices. With the $0.95 per share we received from selling the puts, our net cost will be just $22.05 per share. This is nearly 6% below current prices and also below the low from the most recent pullback.
We will need to set aside $2,205 per contract of our own capital in case we are required to fulfill our obligation. If the stock remains above $23 on June 20, our obligation will not be exercised, and we will simply keep the $95 per contract we received when selling the puts.
So, when calculating our return, we will divide the $95 in income by the $2,205 in capital we set aside. This gives us a return of 4.3% over the course of the next 59 days. If we were to repeat a similar trade every 59 days, our per-year rate of return would be 27% -- well above the rate that most income investments offer.
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This trade is particularly attractive because there are two ways that we can win. First, we have the opportunity to earn 4.3% in income in less than two months. We can also win by purchasing shares of this rebound candidate at a discount and holding shares as they continue to move higher. There is even the opportunity to collect more income by selling covered calls against our stock position after the puts are exercised.
Action to Take --> CCJ offers a great example of the power of options for generating income. While many investors purchase options as speculative trades, we are able to use these same instruments to generate reliable income with materially less risk than traditional buy-and-hold investors.
This article was originally published at ProfitableTrading.com:
Shunned Nuclear Stock Could Yield 27% a Year for Income Traders