Calendar Call Spreads

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With the nuclear threat in Fukishima, Japan earlier this month, stocks like Cameco (CCJ) have taken a big hit.  CCJ has come down in price from $43.59 in February 2011 to its current $30.08.  However, that is just one nuclear plant (or group of plants) among many more throughout the world.  I believe that the selloff is overdone, and expect the stock to resume its uptrend.  To that end, I will create a Calendar Spread, where I will buy LEAP call options, and sell nearer-term call options against them.  Here is the play: I will go to 2013 and purchase the LEAPS for CCJ 35 strike price.  That's a 16% increase over its current price.  I fully expect CCJ to increase by the necessary 16% between now and January 2013.

Buy 2013 35 calls @$4.54

Sell May 2011 35 calls @$.44

Net DEBIT $4.10.

Here I am attempting to amortize the cost of the LEAP calls by selling calls against them.  With a cost basis of $4.10 and 21 months to expiration of my LEAPS, the monthly cost of those LEAPS comes to $0.195 per month.  In other words, in order to recoup my total initial outlay, I will have to get a minimum of $0.195 per month every month until expiration.  Of course, not every month will produce a sellable opportunity against those LEAPS.  The idea is to get much more than the minimum $0.195 per month, and thus make a profit.  The return of $0.44 represents a 9.69% return on my investment ($0.44/$4.54).

If the stock increases in price as expected, I can sell higher-strike price calls monthly against my long LEAPS.  The monthly "covered" calls do not have to be at the 35 strike; they can be at any price.  If I sell a strike below $35, I will be creating a Bear Calendar Spread; if above $35, the spread will be a Bull Calendar Spread.

Ideally, I would wish for CCJ to increase in price beyond $35.  As the price increases, so do the underlying long LEAPS (provided there is enough time to expiration, that is).  Currently, the $35 LEAPS are pure time value.  But if CCJ rises to, say, $40, with enough time before expiration, those LEAPS should rise geometrically, thus producing significant profit.  I'll keep you posted.

Buying to Close (BTC)

On 4/20/2011, I bought to close the May 35 calls for $0.05.  Recall that when I initiated this trade, I sold the May 2011 35 strike call options for $0.44 to reduce my cost basis on the 35 LEAPS to $4.10.   By buying those calls, I accomplished two things: (1) I withdrew my obligation to sell CCJ at 35; and (2) I made a profit on the sold calls, to wit: $0.39 per share, or $195 in cold cash.  This represents 8.59% on my original investment of $4.54, or 88.63% return on the calendar call portion ($0.44/$0.05=$0.39).  My cost basis on the LEAPS is now $4.15.

On 5/04/2011, I sold to open (STO) the Sep. 2011 35 calls for $1.30.  That brings my break-even cost down to $2.85.