Canada’s forest products and forestry industries have been in the dumps for so long that the only place to go is up. And that’s exactly what’s been happening over the past few months. The driver behind the resurgence in the forest products sector has been the anticipation of the end of the recession and a recovery in demand for building materials as the housing market bottoms.

What’s given the sector some extra juice recently is a change in building-code policy in China following several highly destructive natural catastrophes over the past couple of years. The change involves a break in the near-monopoly that concrete fabricators enjoyed in building standards. Concrete-frame structures are not nearly as flexible as wood-frame structures in earthquake-prone regions. Heavy reliance on concrete as a building material usually results in catastrophic loss of life and property damage during episodes of severe earthquake.

A change in building codes in China will lead to greater demand for lumber as a building material. And because China has very little of its own forestry resources, it must import much of its lumber. Enter Canada, which when seen from a satellite, consists mostly of forests. Canadian forestry and forest-product companies are thus poised for continued robust growth into the foreseeable future, if only because of the injection of huge new Chinese demand.

After languishing for so long, Canadian forest products companies have a lot of ground to regain. As the recovery moves forward, there may be an opportunity to capture some of the potential upside in this sector.

The easiest strategy is to buy calls on companies like Canfor Corp. (TSX: CFP, recent price: $7.51) or Sino-Forest Corp. (TSX: TRE, recent price $17.54). But the easiest strategy is not always the best. Because of the volatility in this sector, options on these stocks are relatively expensive. The volatility implied by options on both companies is above 40%, which in terms of cost, sets them in the top quartile of all Canadian equity options.

A better alternative might be covered call writing. With CFP, for example, you could buy the shares at $7.51 and write (i.e. sell) the April 8 calls at 50 cents. The five month return if unchanged is 6.65%. Return if exercised is 14.1% and the downside breakeven is $7.01.

As for TRE, you might want to look at buying the shares at $17.54 and writing the April 18 calls at $1.70. The five month return if unchanged is 9.69%. Return if exercised is 13.6% and the downside breakeven is $15.84.

Finally, since this is the last blog until the new year, I want to wish all of you a very Merry Christmas (I was never that politically correct) and a happy New Year.