A Nuclear Power Stock That Could Make an Explosive Option Trade

02/01/2010 10:17 am EST


If you watched the State of the Union Address last Wednesday, you might have been surprised that the term "nuclear power" was included in the alternative energy lineup.

Some feel that this was thrown in without real promise because of recent actions in 2009 that did not support the nuclear power sector. But it turns out that there may be some substance to this, and it is being seen in nuclear power stocks.

The administration is proposing the tripling of a program that provides loan guarantees made to build and maintain nuclear reactors. The figure being alluded to is $54 billion in loan guarantees that will be unveiled Monday with the White House's fiscal 2011 budget request.

There is one pure play on the US nuclear power industry, and that is USEC Inc. (USU). While other stocks are running because they construct nuclear plants, USEC is a former government subsidiary and the top uranium enrichment company.

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Last summer, the stock was effectively destroyed when a loan guarantee was denied over its new centrifuge plant.

While many stocks have seen 52-week highs, even a 7% gain today to $3.96 leaves USU close to the bottom of its $3.22 to $7.24 52-week trading range. The stock has been north of this before, and there are some fairly easy trades that can be made in options.

I will spare some math terms here, but the using the February expiration just does not leave enough time, and the time value erosion should technically be 6% of the premium paid each day based upon a February 19 expiration date.

Despite the Monday proposal, we also have to consider that if one city is used to delay and change of proposals, it is Washington, D.C.

The March options can be used, but the April expiration are where options traders are finding the sweet spot with total premium versus time value erosion.

The standout speculative trade here is the USU April 5 calls, currently trading for 25 cents per contract. So far, we have seen 1,916 contracts trade versus an open interest of 3,824 contracts.

There is even more speculative trading being seen, with the USU April 6 calls trading 1,654 contracts versus an open interest of 4,883 contracts. The $6 strike is priced at 15 cents now. 

But based upon the history of this stock and the comparable pricing, the $5 strike is probably a better bet.

There are some more positives here for USEC. First, its current core business is deemed safe because there are no plans for the current nuclear power plants in the United States to be immediately dismantled.

Second, the company has the Nuclear Nonproliferation Megatons to Megawatts Program, and that is a win because the administration said that further nuclear weapon elimination between the United States and Russia is on its way.

This is not a trade without risk—just ask anyone at USEC. At first, nuclear power was a no-no with the Democrats, but then it became an inclusion in the campaign. The decision not to guarantee the construction loan for the Ohio centrifuge project last summer was a real blow to the company and brought much skepticism around this stock. There is also no assurance that this project will suddenly be back online.

But options trades are being made around this as a re-visitation of an old, unpleasant political trade.

By Jon Ogg, contributor, OptionsZone.com

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