By Jud Pyle, CFA, chief investment strategist for the Options News Network
Peabody Energy Corp.
continue to rally following BMO Capital's upgrade yesterday, and a bullish trade on the tape suggests one investor expects the stock to continue to move in one direction or the other throughout the near term.
BTU has gained more than 5%, or roughly $2.50, to $39.65 during afternoon trading without any company-specific news on the wires today. Yesterday, BMO Capital upgraded the company to "outperform" from "market perform," and maintained its price target of $49. BTU has not announced its next earnings release date, but the market expects the report around July 20. The July 38 puts and July 41 calls have been active throughout the session today thanks to an investor who appeared to bet that volatility will expand during the next 35 days.
By 1:50 p.m. EST, roughly 6,000 July 38-41 strangles changed hands for a net debit of $3.72 per spread. The July 38 puts crossed the tape for $2 per contract (closer to the ask price when the volume hit the tape) and the July 41 calls changed hands for $1.72 per contract (closer to the ask price at the time of the trade). This options action suggests an investor is calling for BTU shares to be trading below $34.28 or above $44.72 at July options expiration, meaning the bet is on expanding volatility. Implied volatility of the puts is roughly 50% while the calls have an implied volatility of 46% compared to the stock's 30-day historical volatility of 62%. Investors could make significant gains to the downside (investors collect increased gains as the stock moves closer to zero) and could theoretically make unlimited profits to the upside. If the stock is trading between the breakeven prices, the investor will lose some or all of the debit paid.
Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.
Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."