Although nuclear power plants only provid about 12% of the world’s electricity production, growing energy demand put Cameco Corp. (NYSE: CCJ) in a position to benefit. The company is engaged in the exploration, development, mining, refining, conversion and fabrication of uranium for sale as fuel for generating electricity in nuclear power reactors.

The 2011 and 2012 share price lows held at the 2009 $16 a share breakout level. A nearly 40% rally since November 2012 stalled recently at resistance at $23. A push above that level targets $30, the halfway point of the $44 high to recent lows.

The $30 target is almost 40% higher than current prices, but traders who use a capital-preserving, stock substitution strategy could more than double their money on a move to that level.

One major advantage of using long call options rather than buying the stock outright is putting up much less 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.

Simply put, 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 an option with 70%-plus probability.
An option’s strike price is the level at which the options buyer has the right to purchase the underlying stock or exchange-traded fund (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-#

Any trade has a 50/50 chance of success. Buying in-the-money options increases that probability. 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 also approximates the odds that the option will be in the money at expiration. Delta is a measurement of how well an option follows the movement in the underlying security.

With Cameco stock trading at about $21.55 at the time of this writing, an in-the-money $17 strike call currently has $4.55 in real or intrinsic value. The remainder of any premium is the time value of the option.

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 would recommend the Cameco Jan 2015 17 Calls at $5.50 or less.

A close below $17 in the stock on a weekly basis or the loss of half of the option premium would trigger an exit. If you do not use a stop, the maximum loss is still limited to the $550 or less paid per option contract. The upside, on the other hand, is unlimited. And the January options give the bull trend almost a year to develop.

This trade breaks even at $22.50 ($17 strike plus $5.50 option premium). That is less than $1 above Cameco’s current price. If shares hit the upside breakout target of $30, then the call options would have $13 of intrinsic value and deliver a gain of more than 100%.

Action to Take –> Buy Cameco Jan 2015 17 Calls at $5.50 or less. Set stop-loss at $2.75. Set initial price target at $13 for a potential 137% gain in 11 months.

This article originally appeared on ProfitableTrading.com:
Traders Could Bank 137% on This Uranium Stock in Less Than a Year