Thursday, March 24, 2011
Disasters happen. And with each emergency comes the opportunity for profits.
Now, don't condemn me. Don't send threatening emails, and don't tie up the customer service lines with complaints about my insensitivity. Instead, read the rest of this essay and spend your time with more productive pursuits.
Every disaster provides an opportunity for gains. It could be a financial collapse that cuts two-thirds off the share price of Wall Street's biggest investment bank. Or a Gulf Coast oil spill that creates bargains in the energy sector. Even the threat of a potential nuclear meltdown offers a profitable silver lining.
Running from those opportunities won't stop the disasters from happening. Nor will it lessen the suffering of the victims. You can stand on your soap box and claim the moral high ground by refusing to profit. That's about as productive as pinning a ribbon to your lapel.
Yes, it's a nice gesture, and victims will appreciate the thought… But cash is more useful.
Traders have a moral imperative to use their skills to profit from disasters. They can then choose to donate those profits to an appropriate charity to assist in any humanitarian efforts.
You may recall, back when BP's oil spill was mucking up the Gulf Coast, I wrote about how you could get paid just by agreeing to buy shares of BP 50% below where they were trading at the time. It was an easy, low-risk, way to profit off that particular disaster. If you took the trade, you made out quite well.
A similar opportunity exists today with shares of Cameco (CCJ).
CCJ is the world's largest uranium mining company. The shares have been hammered on the news stories surrounding the Fukushima nuclear power plant. The stock is down from last month's high of $43 to just under $32 today.
Predictably, many smart investors think the selloff in Cameco is overdone and the current price is a bargain. I'm not so sure.
Just as I was reluctant to buy BP last year during the oil spill crisis, I'm hesitant to buy CCJ here. At $32 per share, CCJ still trades at 23 times earnings and nearly six times sales. That's a lofty valuation, even for a stock not in the midst of a crisis. It's hard to look at $32 per share and think, "bargain."
But at $17.50 per share... well, now we're talking.
If CCJ falls to $17.50 per share – roughly half its current price – it would be trading at the lowest level since the great correction of 2008. Even the most rigid fundamental investor would have a tough time ignoring CCJ at that price. I'd love to be able to buy the stock there.
But that's probably not going to happen. Let's face it… If a near nuclear disaster can't knock more than one-third off the price of the stock, it's hard to imagine what it'll take to knock it down 50%. That doesn't mean, however, that we can't profit from CCJ.
In fact, we can get paid by simply agreeing to buy Cameco at $17.50 per share. Here's how to do it...
The CCJ January 17.50 puts (CCJ120121P00017500) are currently trading for about $0.50. A seller of these puts is agreeing to buy CCJ at $17.50 per share if the stock is trading below that price on January 21, 2012. For that obligation, the seller receives $0.50 per share today.
In other words, you can collect $50 today just for agreeing to buy 100 shares of CCJ at $17.50 per share if it falls below that level by next January. You'll collect $500 today if you agree to buy 1,000 shares.
This is an example of selling uncovered puts. It's a tremendous income-producing strategy and it's a terrific low-risk way to profit off temporary market disruptions. But you have to use it on stocks you actually WANT to buy and at prices you're actually WILLING to pay. If you don't want to own CCJ at $17.50 per share, pass on this trade and look for something else.
But if you like the idea of buying Cameco and want to get paid for agreeing to buy it at a deep discount from the current price, this trade should prove profitable for you.
After all, it worked pretty well on BP last year.
And if you're interested in donating some of those profits to charity, please consider a contribution to the American Red Cross. They do amazing work.
Best regards and good trading,
For more on Jeff's put option strategies, be sure to check out his recent interview with S&A Digest editor Sean Goldsmith. "I rarely short sell a stock itself," Jeff said. "I'll always go to the put options and use it that way." Read the rest of his interview here: Weekend Edition: How to make 65% in two weeks.
"Used properly, selling puts is an incredibly powerful tool," Brian Hunt writes. Back in December, Brian suggested selling puts as a way to buy silver at a discount. The result was a quick, safe gain. Learn more here: How to Buy Silver at a 10%-20% Discount.