Is Peabody a Diamond in the Rough?
Peabody Energy is down, but traders aren't counting it out.
This stock has been weak for the last year along with so many other coal names, and yesterday it hit a new low under $16. That drop prompted one investor to take an upside shot with a vertical spread, buying the September 19 calls and selling the September 22s for a net cost of $0.43, according to OptionMonster's tracking systems.
Owning calls lock in the price where a stock can be purchased, while selling them obligates the trader to unload shares at a certain level if it rallies. Combining the two lets the investor cheaply control a move between the two strikes. In the case of yesterday's trade, that spread is $3—a potential profit of almost 600 percent based on the entry price.
Peabody fell 2.79 percent yesterday to close at $16.02. The advantage of the September trade is that it gives a fair amount of time for a turnaround in the beaten-down coal industry.
Overall calls in the name totaled 19,400, compared to some 11,300 puts. Total option volume was more than twice its daily average.
—By CNBC Contributor Pete Najarian
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Pete Najarian is a professional investor, CNBC contributor, regular co-host of CNBC's "Fast Money" and co-founder of OptionMonster.com. Najarian is long BTU calls.