Despite seeing strong price action of late, the energy sector appears to be far from overcrowded, with the Wall Street Journal recently reporting Bank of America clients were net sellers of energy-related names for two consecutive weeks. One stock in particular that could present a good opportunity within that sector is Peabody Energy Corp (NYSE:BTU), which has potential support from its half-all time highs near the $22 area, as well as breakout level from a trendline connecting lower highs in mid-August, and the 80-day moving average after its latest crossover.
Peabody Energy stock seems to be flying under analysts’ radars, too, given not many firms cover the equity. And despite its more than 140% year-to-date lead, two of five analysts still call it a tepid “hold,” leaving plenty of room for upgrades. The security is heavily shorted, too, with short interest up 150% so far this year, and now making up 11.9% of the stock’s available float. This implies shorts are losing the battle, making them less likely to increase exposure. In fact, pullbacks like these are viewed as opportunities to cover and control the bleed.
Options are very affordable at the moment, per BTU’s Schaeffer's Volatility Index (SVI) of 80%, which sits in the low 7th percentile of its annual range. In other words, options traders are pricing in extremely low volatility expectations at the moment. The stock’s implied volatility (IV) of 86% is a bargain as well, compared to its historical volatility of 94%.
The security has frequently exceeded option traders' volatility expectations during the past year, pet its Schaeffer's Volatility Scorecard (SVS), which sits at an elevated 71 out of 100. Our recommended call option has a leverage ratio of 2.9, and will double in value on a 38.5% rise in the underlying equity.