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Volatility sellers are targeting Arch Coal

By: optionMONSTER
Posted: 10/24/2011 4:15:00 AM
Referenced Stocks: ACI

Premiums are starting to drop in Arch Coal, and traders are getting out while the getting is good.

optionMONSTER's tracking systems detected the sale of more than 4,000 November 16 calls, most of which priced for $1.47 to $1.55. Volume was more than 4 times open interest in the strike.

ACI rose 1.28 percent to $16.58 on Friday. The coal producer's shares have lost about half their value since April amid concerns about the global economy and lost production at its mine in Mount Laurel, West Virginia.

The call selling reflects a belief that gains in the stock will be limited in the next four weeks. But it also comes as implied volatility pushes down to 66 percent from about 95 percent earlier in the month, which means that options are losing value as traders price in smaller moves.

If an investor owns the shares and wants to earn income on an existing long position , it makes sense to sell calls now before premiums drop further. The timing is also good because time decay will accelerate into expiration.

The November 16 puts were sold for about $1.08, which reflects a similar desire to earn premium from the passage of time. (See our Education section)

ACI's earnings come out the morning of Oct. 28. Volatility and option premiums also tend to fall after the release of financial results, so that could also support Friday's trades.