Coal producer Peabody Energy Corporation (BTU) has traded in a narrow range over the past year. While shares hit a low in May and have trended higher, one trader sees shares declining going into next year.
That’s based on the January 2024 $16 puts. With 168 days until expiration, 14,242 contracts traded compared to a prior open interest of 122, for a massive 117-fold increase in volume on the trade. The buyer of the puts paid $0.59.
Shares recently traded just under $22, so the stock would need to drop $6, or about 27 percent, for the option to move in-the-money. The $16 strike price is also well under the stock’s 52-week low of $17.71.
The coal industry has struggled in recent years, as cleaner technologies such as natural gas have replaced the fuel source. However, Peabody looks inexpensive, trading at less than 3 times earnings. Shares are also just under book value, and the stock trades at just two-thirds its price-to-sales.
Action to take: Shares likely have some long-term downside as the industry continues to fade away, even though there’s still some demand for coal that won’t be replaced overnight. Shares look likely to pull back here, so investors should look elsewhere in the energy space.
For traders, the January puts are inexpensive as a way to bet on a move lower in the coming months. That could play out thanks to issues specific to the energy industry, or due to a market drop in general. That makes for a reasonable bet here.
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 of the companies mentioned in this article.