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June 25, 2013  Tue 4:14 AM CT

BTU: SEE CHART GET CHAIN FIND STRATEGIES
For the second day in a week, traders are looking for Peabody Energy to bounce.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 3,000 August 15 calls for $1.20. Equal-sized blocks were sold at the same time in the August 13 puts for $0.50 and the August 17 calls for $0.50. There was no open interest at any of those strikes, which suggests that new positions were initiated.

The strategy cost just $0.20 and will expand to $2 if the coal miner closes at or above $17 on expiration--a potential profit of 900 percent. The trade combines elements of short puts with a vertical spread to generate significant leverage, while also creating the obligation to buy stock for $13 if shares close below that level eight weeks from now. (See our Education section)

BTU fell 7.19 percent to $14.85 yesterday and has lost about 80 percent of its value since March 2011. Like most other coal producers, the company has suffered from weak global demand and increased competition from natural gas. It's now back to levels last seen in late 2004, which could make some traders think that it's due for a bounce.

On Thursday, the Heat Seeker identified a call spread in the September 19 and September 22 contracts. That trade cost $0.43 and also offers potentially huge profits in the event of a summer rebound. Roughly 3,000 more contracts were added yesterday for $0.28.

Total option volume was quadruple the daily average in the session. Calls outnumbered puts by almost 2 to 1.
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Education & Strategy

Sweet Spot Exceptions

As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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