Buying volatility in Peabody Energy (NYSE:BTU)

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Shares of Peabody Energy Corp. (NYSE: BTU ) 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.

Consult the profit/loss graph below for a visual of this long strangle. I build this graph using my virtual trading account , which I use every day to assess and manage my trades. You can open your own account for free by clicking here .

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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Options

Referenced Stocks: BTU

Jud Pyle

Jud Pyle

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