Lumber prices have recently bounced off 15-year lows. Much like a punch weary boxer pulling himself off the mat.

Longer term, any sustainable rally in lumber hinges on clear signs that the real estate market is stabilizing. A mixed picture at best! Data from March indicates some stability in home inventory and prices. At least for now. Come summer, another wave of mortgage resets and rising delinquency rates could change the trend.

On the other hand, it may be that lumber prices are a leading indicator for the housing market, in much the same way as the stock market is a leading indicator for the economy. If that’s the case, speculators in the lumber pits may be forecasting a turnaround in the construction market sometime late 2009 or early 2010. Making the most recent housing data less relevant.

You could also argue that lumber prices are reflecting a rise in demand from the “shovel ready” stimulus package that recently passed Congress. Presumably that demand would filter down to producers sometime this summer.

If you buy into this, you may want to look at Canada’s lumber producers which have rarely been priced so low in terms of fundamental valuations. Take Canfor Corp. (TSX: CFP, recent price $5.33) as a case in point.

The company has a strong asset base with low debt ratios. The shares have recovered in line with lumber prices, but still trade at slightly more than half of book (book value is estimated at $10 per share). Typically stocks this undervalued see rapid and explosive rallies when economic conditions begin to improve.

Canfor is an optionable stock, which allows aggressive traders to leverage their exposure. Although with limited liquidity in Canfor options, you may have to hold any position to expiry.

With those caveats firmly in place, a couple of strategies come to mind. The first is to buy slightly out of the money calls, such as the CFP JUL 6 calls at 20 cents (as of Friday’s close CFP JUL 6 calls were bid 15 cents offered at 25 cents). With this strategy your risk is limited to the cost of the option. And if lumber does recover, Canfor could bounce to $7 per share.

Another line of attack is to use a synthetic long position in Canfor. The idea with this strategy is to buy a call and write a put at the same strike price and expiration date. For example, buy CFP JUNE 6 calls (bid 10 cents offered at 20 cents) and write the CFP JUNE 6 puts (bid 80 cents, offered at 95 cents). Look to enter this position with a 70 cent credit.

The synthetic long strategy will produce a profit or loss identical to the profit or loss associated with holding a long position in CFP.