March 14, 2011 / 9:08 PM / 6 years ago

Analysis: Betting on nuclear shares a gamble

CHICAGO/NEW YORK (Reuters) - Buying on bad news has often reaped rewards for investors and the Japanese earthquake seems to be such an opportunity, but a possible meltdown at some nuclear plants makes this a riskier gamble than most.

Options bets in major uranium stocks show some don't view Monday's selloff as an automatic buying opportunity.

Japan is still struggling to avoid a meltdown at some nuclear power plants after a hydrogen explosion at one reactor and exposure of fuel rods at another, days after the earthquake and tsunami which may have killed at least 10,000 people.

Shares of nuclear energy companies were hit hard Monday. Exchange-traded funds tracking the sector fell sharply on record volumes as investors fled. The Global X Uranium ETF fell nearly 17 percent on 2.9 million shares and the Market Vectors Uranium and Nuclear Energy ETF lost 12 percent with 2.4 million shares traded.

"I think this is a major long-term fundamental shift in the marketplace," said Shawn Hackett, president at Hackett Advisors in Boynton Beach, Florida. "Many will say it is an overreaction and of course we might get a bounce in uranium prices once things settle down but overall I think this a fairly bearish intermediate-to-long-term shift in psychology."

One favorite among options investors has been Cameco Inc., because its options are already heavily traded. U.S.-listed shares of Cameco, the world's second largest uranium miner behind Kazamtomprom, owned by the government of Kazakhstan, fell 13 percent in active trading on the New York Stock Exchange, but options action was heavy in both bullish and bearish positions.

"Option traders are playing both sides of the fence," said TD Ameritrade chief derivatives strategist Joe Kinahan.

Cameco option volume is 12.8 times the average daily levels with 29,000 puts and 49,000 calls traded, according to option analytics firm Trade Alert. The company, in a conference call, said it doesn't see the quake having a dramatic effect on its business.

"We see buyers of the March $33 calls, expecting that the stock will bounce," Kinahan said. "We are also seeing buyers of the March $30 and $31 puts, which could be a hedge on existing stock positions or a speculative play on additional losses."

"All of the trades are mostly focused on the front two months as people want to digest the news before they make deeper bets," Kinahan said. The March options contract expires this Friday.

Those watching the news have to confront the fact that the situation is evolving. The big fear at the Fukushima nuclear complex, 240 km (150 miles) north of Tokyo, is of a major radiation leak. The complex has already seen explosions at two of its reactors, and it raises concerns about the future of nuclear energy in countries with plants.

"I think it's a buying opportunity but then before I have more conviction in that statement we want to see for a couple of days to get a better idea of how things are going," said Siddharth Rajeev, head of research at Fundamental Research Corp. in Vancouver, British Columbia, Canada.

The price of options were bid up aggressively on Monday in many uranium stocks, suggesting investors expect tremendous volatility with big swings in share prices in the near-term.

Options volume in USEC Inc., a provider of enriched uranium fuel for commercial nuclear plants, was 13.2 times the typical levels with 6,162 puts and 9,978 calls traded, Trade Alert data shows. One option trade initiated already is taking the view that volatility is too high, with the sale of a block of October $6 calls, which appears to be an opening position tied to shares, anticipating less gyrations in the stock in coming months.

"I don't think this is the end of the nuclear industry," said BMO Capital Markets analyst Edward Sterck. "With the hype that some commentators are making that this is the end of the nuclear energy, I think we're going to possibly see an overreaction in the stock prices."

Reporting by Doris Frankel; Additional reporting by Julie Gordon, Lynn Adler, Ed Krudy, Chuck Mikolajczak, and Rodrigo Campos

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