Coal producer Peabody Energy (BTU) has been roughly cut in half this year, amid a lackluster energy market. One trader sees further downside in the weeks ahead.
That’s based on the June $11 puts. With 61 days until expiration, 5,549 contracts traded compared to a prior open interest of 160, for a 35-fold rise in volume on the trade. The buyer of the puts paid $0.92 to make the bullish bet.
Peabody shares recently traded for about $12, so they would need to decline by $1.00, or about 8.4%, for the option to move in-the-money. The strike price of the option is still well above Peabody’s 52-week low of $9.61.
In addition to shares getting cut in half, Peabody has seen its growth collapse by 84% in the past year. Overall revenues are down by 9%.
Plus, the U.S. continues to shift away from coal as a fuel source, and outsourcing to China looks unlikely amid the current trade war.
Action to take: The fundamentals are working against coal right now, so Peabody shares are likely to keep trending lower. Interested investors have other opportunities in the energy sector right now until the fundamentals change.
For traders, the June $11 puts are well positioned for the current weakness in both Peabody shares and in the overall market. Traders can likely see mid-double-digit returns.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.