Shares of coal mining giant Peabody Energy (NYSE:BTU) are struggling to head higher after a red-hot rally. BTU stock has nearly doubled in price since the late February lows under $15. Some of the move higher was warranted given the bullish backdrop for energy created by the Ukraine conflict. Things have now come too far, too fast. Time to sell an overhyped and overbought BTU on the next leg up in price.
It wasn’t too long ago that coal miners were left for dead. The Green Energy Revolution had no room for coal companies like Peabody Energy. The recent explosion in energy prices and supply concerns has changed all that, at least for now. Sky high natural gas prices and a proposed ban on Russian coal by the European Union has added fuel to rally in coal stocks.
Important to remember, however, that much of the latest move higher in coal is likely short-term in nature and already priced into the BTU stock price. The EU has already delayed the ban on Russian coal another month until August. There is a good chance that the Ukraine conflict will be resolved by then and an even better chance the ban on Russian coal will be watered down as well.
Coal prices peaked at over $400 on March 7. Since then they have fallen back to the $300 area. BTU stock has remained pretty much unchanged in that same time frame. Look for Peabody to struggle unless coal prices break out to fresh new highs.
The technicals all point to continued consolidation for BTU. Shares have struggled mightily to break out past the $27.50 level.
Shorting BTU stock outright is both risky and expensive. Luckily the options market provides a viable alternative.
For example, selling the July $30/$32 call spread would bring in a 50 cents net credit. This equates to $50 for each spread sold. The risk on the trade is $150 per spread. Return on risk is 33%. The short $30 strike price provides a roughly 15% upside cushion to the current price of BTU stock. It is also well above the major resistance level of $27.50.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
