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Oversold and Unloved Can Spell Trading Profits

Arch Coal is off its recent lows after building a solid price base of support. Since natural gas producers are slowing or shutting down rigs as a result of low prices, it stands to reason that the coal industry is currently in as bad of shape as can be expected.

After a cut in the dividend pushed share prices lower, the risk of further dividend cuts impacting the share price is largely priced in. Most or all of the expected negative news is already priced in.

Even with lower natural gas prices, shares in Arch Coal are starting to trade higher. Shares are up 2% from a month ago.

The short interest is anything but short. The number of shares shorted is markedly elevated and should be treated as warning that shorts anticipate upcoming price weakness. The current float short is 20.7%.

The only way I would consider putting a position on with Arch Coal is either selling covered calls, or selling cash secured put options. By selling options, investors lower their risk and use option premium time decay to their advantage.

An example is selling the April $7 put option for 75 cents or more. If I sell an option and the stock is put to me, my cost basis will be only $6.25. If the stock doesn't trade below $7, the gain is more than 10% in three months.

ACI Payout Ratio TTM Chart
ACI Payout Ratio TTM
data by YCharts

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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