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Peabody Energy Traders See More Upside Ahead

Are BTU shorts hedging with front-month calls?

by 11/6/2012 12:39 PM
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The shares of Peabody Energy Corporation (NYSE:BTU - 29.52) are extending their recent uptrend today, bringing their month-to-date gain to over 5%. What's more, it appears some options traders are either anticipating more short-term upside for the coal concern, or are hedging their bearish bets in the event of a post-election boost.

Around midday, BTU has seen roughly 9,600 calls change hands -- about six times the number of BTU puts exchanged. Around two-thirds of the action has taken place at the out-of-the-money November 31 call, where close to 6,200 contracts have traded. Ninety-one percent of the calls have crossed at the ask price, and implied volatility was last seen 4.2 percentage points higher, hinting at buy-to-open action.

More specifically, the calls traded at a volume-weighted average price (VWAP) of $0.38. Assuming the call buyers are "vanilla" option bulls, they'll begin to profit if BTU surmounts the $31.38 level (strike plus average premium paid) -- in territory not charted since early May -- within the next couple of weeks. If the buyers are skeptics in disguise, their primary goal is for BTU to blaze a trail lower in the short term, but the calls act as "insurance" on their short positions, should BTU continue its advance.

And speaking of, BTU is plagued by its fair share of pessimism, despite outperforming the broader S&P 500 Index (SPX) by more than 31 percentage points during the past 20 sessions. Short interest edged nearly 4% higher during the past month, and now accounts for 9.6% of the stock's total available float. What's more, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.87 ranks in the 65th percentile of its annual range, suggesting short-term options traders are more put-heavy than usual right now.

As alluded to earlier, the shares of BTU have been on fire, tacking on about 54% since touching a multi-year low of $18.78 in late July. Ushering the security into the black has been its 10-day moving average, which hasn't been violated on a daily closing basis since Oct. 3. At last check, BTU has added 3.5% to flirt with the $29.52level -- which could point to hopes for a Romney win.

Daily Chart of BTU since July 2012 With 10-Day Moving Average


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