Schaeffer's Trading Floor Blog

Call Players Pile On Amid Peabody Energy Corporation (BTU) Rally

BTU's positive price action is continuing today amid a sector-wide boon

by 4/8/2014 2:32 PM
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Peabody Energy Corporation (NYSE:BTU) option bulls have not been shy about making their presence known at the Chicago Board Options Exchange (CBOE) of late. In fact, over the past five sessions, traders have bought to open 4,774 calls, compared to just 94 puts, resulting in a top-heavy call/put volume ratio of 50.79.

Widening the sentiment scope to include data from the International Securities Exchange (ISE) and the NASDAQ OMX PHLX (PHLX) -- and expanding the time frame to include two weeks' worth of data – echoes this bullish skew. The equity's 10-day ISE/CBOE/PHLX call/put volume ratio of 4.26 ranks in the 66th percentile of its annual range, meaning calls have been bought to open over puts at an accelerated clip in recent weeks.

This call-skewed trend is especially evident among options expiring in three months or less, per BTU's Schaeffer's put/call open interest ratio (SOIR) of 0.55, which ranks lower than 98% of similar readings taken over the past 12 months. Simply stated, there's rarely been more of a call-bias among short-term BTU speculators during the last year.

In the April-dated series -- which expires at next Thursday's close -- peak call open interest can be found at the 17 strike, where nearly 9,700 contracts currently reside. Since Feb. 24, more than 7,500 long calls have been initiated here, signaling the expectation that BTU would topple the $17 mark. Good news for these option bulls -- the equity reclaimed its perch atop this overhead mark last Friday, after Cowen and Company upgraded the stock to "outperform" from "market perform" and raised its price target for BTU by $1 to $20. The security is now on pace to notch a third consecutive daily close north of $17.

Looking elsewhere reveals that short interest jumped 27.8% during the last two reporting periods, and now accounts for a healthy 8.3% of the stock's float. In light of this, a portion of the call buying at the April 17 call may have been at the hands of short sellers hedging against a move above $17. As it turns out, the majority of the long calls mentioned before were initiated in late March when the strike was out-of-the-money.

On the charts, BTU has been in rally mode of late, which may be prompting the change of heart among option traders (or hedging among shorts). Specifically, since hitting its year-to-date low of $15.18 on March 20, the shares are up 17.3% to trade at $17.80. This momentum is continuing in today's session, with Peabody Energy Corporation (NYSE:BTU) enjoying a sector-wide lift following a big bankruptcy reveal from coal producer James River Coal Company (NASDAQ:JRCC).

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