Odd Options Action in the Coal Sector

The pullback in coal stocks continues today with quirky options activity apace. Shares in International Coal Group (ICO - commentary - Cramer's Take), which is due to report earnings today after the bell, are down 4.4% at $48.96, as our option scanners pick up a seven-fold increase in option trading volume.

Today it appears that option traders are eschewing the front-month contract, which is under the sway of earnings reports and the current sectorwide down-drift, and looking to lock in upside call positions at the September 10 strike for 80 cents apiece. Options traders are pricing in a 44% probability of that strike landing profitably by Sept. 19 -- and even further afield in the December 15 calls at 40 cents apiece.

The delta on that position indicates a 21% chance that International Coal Group shares can make the 66% upward trek to $15 by mid-December -- a climb that would certainly be hastened by continued consolidation in the space that might see ICO as a attractive target.

We continue to follow these option trades closely because of the ongoing general pullback in the sector that comes even as many observers forecast continued upside -- particularly for producers who mine coal used in ore processing -- and a high level of consensus among industry watchers that more acquisitions are likely to follow last week's acquisition of Alpha Natural Resources (ANR - commentary - Cramer's Take) by Cleveland-Cliffs (CLF - commentary - Cramer's Take). Much of the activity in the options market this week has hardly been as clear cut, however.

On Tuesday, we observed unusually large ratio put backspread activity in Peabody Energy (BTU - commentary - Cramer's Take), as it closed 6% lower at $64.95. This position targeted the September contract on no apparent news catalyst, where a 2-by-1 spread showed a trader buying 20,000 of the September 55 puts at $2.90 and selling 10,000 of the 65s at $7.00, taking a $1.20 credit on a transaction that allows the trader to double up on downside protection at no initial cash outlay (in fact, taking a credit on the transaction).

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At the time of publication, Darst had no positions in the stocks mentioned.

Rebecca Engmann Darst is an equity options analyst for Interactive Brokers in Greenwich, Conn., and is the author of its daily "Options and Futures Intelligence Report." Each Thursday at 6:30 a.m. EST, she delivers the early-morning lowdown on option volume and sector trends on CNBC's "Squawk Box." She also appears on BNN Canada and has been a guest on Fox News' "Your World With Neil Cavuto."

Prior to her work in the equity options market, she spent seven years in Scandinavia as a Copenhagen-based chief reporter for a European Commission news service, correspondent for Spanish daily El Mundo and Radio Netherlands, followed by stints at Nordea Bank and Saxo Bank.