Sometimes you need to go outside of the normal spreads to adjust an option trade to your needs. Today's option will use a custom combination spread for CCJ stock.

The Nuclear Option
With debt ceiling negotiations done, it looks like an obstacle to funding for alternative energy projects has been removed. Cameco (CCJ) stock is a way to take advantage of the nuclear option. It's ranked No. 1 in the metal ores mining group, according to the IBD Stock Checkup. What's their metal specialty? Exploration and refining of uranium.

CCJ stock has relative strength that is on the rise so I'm keen on exploring options that will allow me to participate with controlled downside.

Options Trading Turns 50; What It Means For You

There are several tools for that in the option toolbox but I'll use the flexibility of options to create my own custom combo spread. This will position me for significant upside while reducing my cost to engage. The option expirations I'm using are for July but if I acquire CCJ stock this could be a longer-term hold into September. We'll certainly revisit this trade as it continues to perform.

Creating A Custom Option Spread
For this trade, I'll use a combination of calls and puts at different strike prices but the same expiration:

Buy to open 1 CCJ stock July 21 monthly 30 strike call at $2.00
Sell to open 2 CCJ July 21 monthly 26 strike puts at 20 cents each
Total debit spent is $1.60 per spread or $160 for a block of 100 shares. This trade has a total risk of 1.60 per share if the price of CCJ stock holds at $26. The break-even price (before commissions) is 31.60

The maximum return is unlimited. But we must set an alert for the price point of 26. If it falls, you'll have an outside chance to acquire this stock at the 26 price point in July at expiration with the puts. The break-even at that time will be 27.60, so you may also manage risk there depending on how CCJ stock behaves. Because we have found this in a search for good stocks to buy, we have the wind at our backs.

Understanding The Custom Spread
This spread on CCJ stock holds short puts that allow me to enter when prices dip into support. I'll be watching this one on the weekly chart formations as it holds the upward moving averages.

The more likely case is a move to the upside. If CCJ stock chart moves up out of its range, my long calls will increase in value. My short puts will help offset some of the cost of the trade allowing me a cheaper entry to the stock as it rises. If the chart fades to support, I will be able to accumulate the stock over a key support region.

Trade Management
Identify the key chart levels.

CCJ stock tested support at its 50-day moving average level on May 31 around 26. That's a key area of a support location for me. As the chart has been grinding northward it's now retesting the breakout level of 30.50. I am positioned to take advantage of support tests as well as upward trajectory.

CCJ Stock Custom Option Spread Scenarios
What could happen:

The most likely case is that CCJ stock moves higher and sits over 31.50 near expiration. We can exercise the call or take profit on the position close to expiration.
If CCJ stock moves lower but holds higher lows above 26, we can set an alert for a stop based on my parameters for risk. For the option, I would suggest erosion of no more than 30% of the cost of this trade.
For those that like the idea of picking up shares of CCJ stock at a lower price, that's also a possibility with this trade. On the outside chance that we get below 26, the short puts offer a chance at picking up CCJ stock if assigned. It requires some adjustment in risk parameters but shows you how custom spreads can give you many levers for managing a trade. If that scenario unfolds we'll address it in an options column update.
Stock moves below 28 under heavy volume for three days without lifting — this is a signal that we must leave the position.
Set an alert for the prices on the edges (near 26). If they trigger, give the trade a few days to wiggle through and then make your decisions based on your own risk profile.

As with all trades, consider what you like about holding the position in the first place and consider your risk carefully.

Source: www.investors.com