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Deeper Decline Could Be in the Cards for Peabody Energy

Underperforming BTU is still surrounded by plenty of optimism

by 9/6/2012 3:13 PM
Stocks quoted in this article:

Coal concern Peabody Energy Corporation (NYSE:BTU - 21.33) has been a long-term laggard on the charts, as clearly evidenced by its 52-week deficit of more than 56%. Over the past 60 sessions, in fact, BTU has underperformed the broader S&P 500 Index (SPX) by more than 14 percentage points, on a relative-strength basis.

Since May 2011, BTU's downtrend has been highlighted by stubborn resistance at its 10-week and 20-week moving averages. In the intervening months, the stock has managed to close only one week atop this duo. While the shares have yet to break support in the round-number $20 neighborhood, a continued descent by these troublesome trendlines could easily pressure BTU into the teens.

Weekly Chart of BTU since February 2011 With 10-Week and 20-Week Moving Averages

However, traders seem generally upbeat toward the commodity stock. During the past 10 days, 4.08 calls have been bought to open for every put on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio ranks higher than 81% of comparable readings taken over the last year, reflecting a healthier-than-usual appetite for bullishly slanted options.

Plus, out-of-the-money calls are most popular. The September 24 strike carries peak front-month call open interest of 12,214 contracts, while the September 25 call has 8,142 contracts outstanding. As expiration draws closer, an unwinding of the hedges related to these calls could bode ill for the shares.

Elsewhere, though, short interest on BTU has ramped up considerably since the start of the summer. As of June 1, only 7.52 million shares were sold short, but that number has since ballooned to 17.88 million. During the near term, a continuation of this short-selling activity could create a steady headwind for BTU.

Analysts, meanwhile, are almost comically bullish on the stock. Out of the 19 brokerage firms offering up an opinion, 18 have doled out a "buy" or better recommendation on BTU -- which leaves plenty of room for downgrades as the poor price action continues. Any negative notes from this crew could bring more bearish attention to the equity.

Traders expecting additional downside from BTU may want to consider the stock's October 25 put.


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