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TheStreet Open House

Is Peabody a Diamond in the Rough?

By Pete Najarian, co-founder of OptionMonster

NEW YORK -- Peabody Energy (BTU) 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 Thursday 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 43 cents, 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 Thursday's trade, that spread is $3 -- a potential profit of almost 600% based on the entry price.

Peabody shares fell 2.79% Thursday 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.

Najarian is long BTU calls.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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