Is Walter Energy (WLT) destined for greatness?

In last night’s edition of CNBC’s Mad Money, Jim Cramer said he thinks Walter Energy (NYSE: WLT) is the way to play China’s insatiable appetite for coal. The company’s shares were trading at $86.83 at the time of Cramer’s bullish call.  When a market pundit sends out comments like this, investors who use options can try many different strategies, as opposed to just buying or selling the shares outright. Below are two examples of some ways options investors might follow or rebel against Cramer’s opinion.  These are not buy-sell-hold recommendations – just a pair of potential strategies that fall into the bullish and bearish camps.

Bearish Option Strategy: Long Call Spread

Those who agree with Cramer and expect upside (or at least limited downside) in WLT might be trying to buy call spreads with the September 60/90 call spread (buying the 60 call, selling the 90 call).  This spread is currently trading near $20, and that debit plus commissions is the maximum risk to this strategy, while the maximum reward is $10 minus commissions (a return on risk of 50%).  This spread will be profitable at expiration if WLT shares are trading above $80 when these positions expire on September 17th.

Bearish Option Strategy: Long Put + Short Call Spread

On the flip side, investors who don’t agree with Cramer’s bullishness could be buying puts and simultaneously selling call spreads.  Investors would do this by, for example, buying June $75 puts for $4 each, and simultaneously selling the June 95/120 call spread (selling the 95 call, buying the 120 call) for $4.  The net debit is $0 at the outset.  The maximum amount that investors can lose with this strategy is capped at $25 (the difference in call strikes) and occurs if the stock is above $120 at June expiration.  The maximum profit is $75 per spread in the unlikely event that the stock is trading at $0 at June expiration.  This strategy will be profitable at expiration if WLT shares are trading lower than $75 when these options expire on June 18th.

Options give people options, and these are just two of the many strategies that people might employ to reflect their investment opinion.  Cramer thinks a lump of coal may be a good thing for Walter Energy … comment below to let us know if you agree or disagree.

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