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Uranium Arbitrage (Pair Trade) at Trader’s Narrative




Uranium Arbitrage (Pair Trade)


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Here’s a trading opportunity you don’t see every day!

On March 31st 2007 Uranium Participation Corp. (U) had a NAV of $12.38, while it traded for $16.00 on the Toronto Stock Exchange. After a spike up to a high of $18.76, it is now back to $16 a share (all amounts Canadian). That represents a premium of approximately 23% to the underlying commodity.

Since Uranium Participation represents actual uranium (the commodity), I’ll be going short the Uranium Participation Units and long the upcoming NYMEX UxC Uranium futures to arb out this premium. My only risk will be currency exposure between the US and Canadian dollar but since this should be a short term trade, that’s acceptable to me.

As of April 13th 2007, the short position of U on Toronto Stock Exchange, was 2,479,300 shares. This was a reduction from the 3,416,000 sold short on March 30th, 2007. I wish the exchanges would release this info with less time lag!

This trade is a great example of a non-directional trade. Although both positions are in uranium, the actual price of uranium doesn’t have to move for the position to be profitable. All that has to happen is a collapse of the NAV premium in Uranium Participation Units (U) to reflect the real uranium prices on the NYMEX.

By the way, this happened before when Central Fund of Canada Limited (CEF.A) - a closed-end fund in Canada investing in gold and silver - had its premium collapse after the introduction of the streetTRACKS Gold Trust ETF (GLD) and the iShares Silver Trust ETF (SIL).

Watch Out!
Historically, the introduction of a new contract has usually meant an intermediate high in prices. But since this is non-directional, it won’t affect me. If you’re long uranium or uranium stocks though, we could be in for a rough patch as this is a reliable contrarian indicator.

The other dark cloud on the horizon is that according to inflation adjusted prices, we are almost at the previous high (~$115/lb) last seen in the late 1970’s. After a parabolic move up within a few short years, I won’t blame anyone for being nervous to see prices at previous resistance levels.

Cheatsheet for the upcoming NYMEX UxC Uranium futures contract:

  • U3O8 (yellowcake) is concentrated uranium oxide produced from uranium ore and is the most actively traded uranium-related commodity. Its primary use is as fuel for nuclear reactors.
  • NYMEX UxC Uranium U3O8 futures will be launched at 6:00 pm May 6, 2007 (Sunday) for the trade date of May 7, 2007 (Monday).
  • Contract symbol will be UX
  • Contract size is 250 pounds of uranium U3O8 (currently spot price: $113/lb.)
  • Minimum tick size is $0.05
  • It will be a financially settled contract with each month settling on the corresponding spot month-end U3O8 price published by The Ux Consulting Company.
  • Trading hours are 6:00 PM through 5:15 PM, New York time, Sunday thru Friday, with a 45 minute break each day between 5:15 PM and 6:00 PM.
  • Initially, 36 consecutive months will be listed. The first listed month will be June 2007.

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3 Responses to “Uranium Arbitrage (Pair Trade)”  

  1. 1 John Z

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    Great idea, think it might actually work. Currency is not a big problem as it’s hedgable. Just wondering how soon the premium will disappear and whether there could be some sort of hidden squeeze, don’t they say ” show me an arb, I will show u a squeeze in one of these books”?

  2. 2 Babak

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    John,
    yeah, you’re right, the fx exposure can be ironed out. And the plan is always perfect just before contact with the enemy! Just to make sure people understand: I am NOT recommending people actually do this. I’m just talking out loud.

    Remember that Trader’s Narrative comes with two warning labels.

  3. 3 ViPi

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    How will you calculate the hedge-ratio?

    V.

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