Coal Rally Draws Buyers to Peabody

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Coal miners dominated yesterday's market gains, and bulls clambered for exposure to Peabody Energy.

OptionMonster's market scanners detected huge volume in the St. Louis-based company, with more than 36,000 contracts changing hands. That was almost quadruple its daily average.

The first big trade that caught our attention entailed the purchase of 2,500 January 25 calls for $1.32 and the sale of an equal number of January 19 puts for $1.92. Owning calls locks in the price where shares can be sold, while selling puts can make money if the stock climbs or holds its ground.

Combining the two strategies is strongly bullish, letting the investor collect a credit of $0.64 and carrying the potential of infinite profits if the stock rallies. But he or she also faces losses to the downside.

Peabody rose 2.1 percent to $20.90 yesterday. It's up 10 percent in the last two weeks as improving sentiment toward global growth lifts economically sensitive material stocks.

Later in the session, an even larger Peabody trade occurred in the form of a call spread. More than 9,000 June 21 calls were bought, mostly for $1.05, while a similar number of June 23 calls were sold for $0.35. The trader stands to receive $2 if BTU closes at or above $23 on expiration, a profit of 186 percent.

Calls accounted for more than 80 percent of yesterday's total volume in the name, a reflection of the bullish sentiment.

—By CNBC Contributor David Russell

Additional News: 'Sign of a Bottom' in Peabody: Analyst

Additional Views: Are MaterialsFinally Ready to Rally? : Russell

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Disclosures:

David Russell is a reporter and writer for OptionMonster. Russell has no positions in BTU.

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