Market News

August 17, 2012  Fri 12:20 PM CT

A large trader is making a long-term bet on the coal industry with Consol Energy.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 6,000 January 39 calls for $1.08 and the sale of 3,000 January 29 puts for $2.48. The transaction accounted for almost all the volume in the Pennsylvania-based company so far today.

Buying calls makes the investor long the stock, while selling puts creates potential downside risk. Combining the two results in a position that's similar to owning shares, but with strong leverage to the upside. This type of trade is often known as bullish combination or bullish "risk reversal."

The unusual aspect of today's strategy is that the trader bought twice as many calls as the number of puts that were sold. He or she also selected puts that are much closer to the money, receiving an initial credit of $96,000 with the potential to earn huge profits if CNX rallies toward or above $39. A similar transaction occurred in the name on Aug. 10.

CNX is down 0.76 percent to $31.95 in afternoon trading. The coal and natural-gas producer fell along with other companies in the sector earlier in the year as investors worried about the global economy, but it has been working its way higher since late June.

Today's option trade will prevent the investor from missing out in the event of a strong rally, which could occur if economic data improves. It also affords the opportunity to buy shares for $29 if they pull back to that level. If nothing happens and CNX remains range-bound, the entire position will expire worthless.
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