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June 21, 2013  Fri 5:16 AM CT

Peabody Energy is down, but traders aren't counting it out.

This stock has been weak for the last year along with so many other coal names, and yesterday it hit a new low under $16. That drop prompted one investor to take an upside shot with a vertical spread, buying the September 19 calls and selling the September 22s for a net cost of $0.43, according to optionMONSTER's Heat Seeker system.

Owning calls lock in the price where a stock can be purchased, while selling them obligates the trader to unload shares at a certain level if it rallies. Combining the two lets the investor cheaply control a move between the two strikes. In the case of yesterday's trade, that spread is $3--a potential profit of almost 600 percent based on the entry price. (See our Education section)

BTU fell 2.79 percent yesterday to close at $16.02. The advantage of the September trade is that it gives a fair amount of time for a turnaround in the beaten-down coal industry.

Overall calls in the name totaled 19,400, compared to some 11,300 puts. Total option volume was more than twice its daily average.

Disclosure: I am long BTU calls.

(A version of this post appeared on InsideOptions Pro yesterday.)
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