Cameco Corporation (NYSE: CCJ) is involved in the exploration, development, mining, refining, conversion and fabrication of uranium for use in electricity generation in nuclear power reactors.

The stock traded at a high near $45 in early 2011, just prior to the earthquake and tsunami that destroyed the Fukushima Daiichi nuclear power station in Japan. While this tragedy did slow the industry’s growth, it did not halt this efficient form of energy production, which provides about 11% of the world’s electricity.

Shares of CCJ have been volatile for the past week after the company announced it would shut down production at its McArthur River mine and Key Lake mill due to a union strike. However, management said it doesn’t expect the strike to affect its uranium delivery commitments.

Looking at the bigger picture, CCJ has consolidated from $18 to $26 for the past three years. A base has formed with the long-term prospects favoring the bulls at these levels.

A conservative target is the $22 midpoint of the trading range that should act as the first resistance level. If CCJ can break out of the channel, the larger objective would be an $8 move to $34.

The $22 target is about 13% higher than recent prices, but traders who use a capital-preserving, stock substitution strategy could make 54% on a move to that level.

One major advantage of using a long call option rather than buying a stock outright is putting up much less capital to control 100 shares — that’s the power of leverage. But with all of the potential strike and expiration combinations, choosing an option can be a daunting task.

You want to buy a high-probability option that has enough time to be right, so there are two rules traders should follow:

Rule One: Choose a call option with a delta of 70 or above.

An option’s strike price is the level at which the options buyer has the right to purchase the underlying stock or ETF without any obligation to do so. (In reality, you rarely convert the option into shares, but rather simply sell back the option you bought to exit the trade for a gain or loss.)

#-ad_banner-#​It is important to buy options that pay off from a modest price move in the underlying stock or ETF rather than those that only make money on the infrequent price explosion. In-the-money options are more expensive, but they’re worth it, as your chances of success are mathematically superior to buying cheap, out-of-the-money options that rarely pay off.

The options Greek delta approximates the odds that an option will be in the money at expiration. It is a measurement of how well an option follows the movement in the underlying security. You can find an option’s delta using an options calculator, such as the one offered by the CBOE.

With CCJ trading near $19.45 at the time of this writing, an in-the-money $17 strike call option currently has about $2.45 in real or intrinsic value. The remainder of the premium is the time value of the option. And this call option has a delta of about 76.

Rule Two: Buy more time until expiration than you may need — at least three to six months — for the trade to develop.

Time is an investor’s greatest asset when you have completely limited the exposure risks. Traders often do not buy enough time for the trade to achieve profitable results. Nothing is more frustrating than being right about a move only after the option has expired.

With these rules in mind, I recommend the CCJ Mar 17 Calls at $3.25 or less.

A close below $17 in CCJ on a weekly basis or the loss of half of the option’s premium would trigger an exit. If you do not use a stop, the maximum loss is still limited to the $325 or less paid per option contract. The upside, on the other hand, is unlimited. And the March options give the bull trend more than six months to develop.

This trade breaks even at $20.25 ($17 strike plus $3.25 options premium). That is less than $1 above CCJ’s recent price. If shares hit the $22 target, then the call option would have $5 of intrinsic value and deliver a gain of 54%. 

Recommended Trade Setup:

— Buy CCJ Mar 17 Calls at $3.25 or less
— Set stop-loss at $1.62
— Set initial price target at $8 for a potential 54% gain in 6.5 months

Note: There’s another call option strategy that lets you earn $1,200 or more each month from the stocks you already own — by “renting” them out to other investors. To learn about this easy process, click here.