Uranium Participation Corporation (Symbol U on the TSX exchange) is a company that invests in uranium.

Uranium presents an attractive investment opportunity at this time. The commodity itself is currently trading at below the cost of production for most miners, a situation that cannot continue indefinitely. Eventually companies will be forced to curtail production, and this will send the price of uranium higher.

Uranium is a restricted commodity so it cannot be owned by non-authorized participants. Given that many uranium mining companies are having difficulty earning profits at the current market price for uranium, a more attractive method of playing for a rebound in this industry could be to buy call options on Uranium Participation Corp.

The price of Uranium Participation Corp shares has fallen over the past few months.

Share price of Uranium Participation Corp (TSX:U)

Source: Bloomberg

The majority of this decline has been the result of an increase in the discount to NAV (net asset value). Net asset value (NAV) is the value of an entity’s assets minus the value of its liabilities, often in relation to open-end or mutual funds, since shares of such funds registered with the U.S. Securities and Exchange Commission are redeemed at their net asset value. Closed-end funds trading in the open market can trade at a discount or premium to their NAV.

Discount to Net Asset Value (TSX:U)
Source: Bloomberg

On January 31, 2020 the April $4 call is offered at $0.20 per contract.

Speculating on a change in sentiment in the Uranium sector
Source: Big Picture Trading

Even a simple return to NAV (last reported price of $4.25 at year end) would result in the option call being profitable.

However, if uranium were to rally and sentiment within the sector to shift, it would be easy to envision uranium rallying 10%. At that point, the discount might even shift back to a premium (as seen in 2018).

A 10% increase NAV would equate to $4.675/share and a shift back to a 5% premium, could see the price of Uranium Participation Corporation shares trading at $4.91.

Risking $0.20 to potentially earn $0.71 is an attractive investment opportunity.

Potential Outcomes at Expiry

Source: Big Picture Trading

Rarely do such deep value situations present themselves in the options market.


The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.

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