Options Corner: Peabody Energy Could Ride A Red Wave Back To Relevance

All other things being equal, coal represents a viable energy source, which theoretically should make Peabody Energy Corp BTU a compelling investment. Of course, not all things are equal. For BTU stock, one of the core headwinds is the underlying industry's emissions, a matter that clashes with ongoing movements to pivot toward clean and renewable solutions. But that's also why President Donald Trump has been a godsend for BTU stock.

Earlier this year in April, Trump unveiled sweeping plans to revive U.S. coal production, representing a paradigm shift from the environmentally forward agendas of the Biden and Obama administrations. Under the initiative, federal agencies have been directed to fast-track mining permits, slash environmental regulations and expand coal leases on federal lands.

"Pound for pound, coal is the single most reliable, durable, secure, and powerful form of energy on Earth," the president declared, offering a conspicuous departure from contemporary talking points. While coal as a fuel source is a scientific reality, as the U.S. Energy Information Administration states, "producing and using coal affects the environment."

Not coincidentally, BTU stock popped higher when Trump made his announcement. Since the close of April 7, BTU has gained about 44%. Not only that, the security has printed an upward trend channel, arresting the steep decline that occurred since early November last year.

With the president signing the "Big Beautiful Bill" — through which he emphasized that the U.S. will rely on traditional industries like coal to meet the nation's growing energy needs — BTU stock appears to have caught a lifeline. Even better for options traders, market makers may be offering an enticing proposition.

Leveraging Applied Game Theory To Set Up BTU Stock

While it's always nice to converse about a company's fundamentals to understand the underlying color and context, at the end of it all, it becomes an exercise of financial cosplay. As options traders, we need a working thesis that captures two components: expected magnitude (y-axis) and time frame (x-axis). To meet this requirement, we may use applied game theory — essentially the deployment of practical strategies to improve our odds.

Before we can even talk about game theory, however, we must understand the rules of the game. As is central to any fair competition, the rules must be the same for all competitors. When it comes to trading or investing, the opponent is really the market. As such, there's no reason to give it an advantage by attempting to analyze the share price, which constantly fluctuates and creates unnecessary noise.

Instead, we can strip down this noise by converting all price action into market breadth or sequences of accumulative and distributive sessions. This way, we're answering one question, arguably the most important question: was the market a net buyer or net seller? By analyzing the root of demand, we can more easily identify recurring patterns via the segregation of price action into discrete events.

Conducting the above exercise for BTU stock across rolling 10-week intervals reveals the following demand structure:

In the trailing two months, BTU stock has printed a "4-6-U" sequence: four up weeks, six down weeks, with a positive trajectory across the 10-week period. It's a relatively rare sequence, having only materialized 17 times since January 2019. However, the main takeaway is that in 58.82% of cases, the following week's price action results in upside, with a median return of 5.41%.

What's critical to note is that usually, BTU stock carries a negative bias. Therefore, the flashing of the 4-6-U sequence provides an edge that bullish options traders could potentially exploit. In addition, if the bulls maintain control of the market for the next few weeks, a push toward $16 is realistic, judging from the implications of past analogs.

Powering Up On The Coal Trade

Based on the market intelligence above, aggressive but rational traders may consider the 15/16 bull call spread expiring Aug. 15. This transaction involves buying the $15 call and simultaneously selling the $16 call, for a net debit paid of $43 (the most that can be lost in the trade). Should BTU stock rise through the short strike price ($16) at expiration, the maximum reward is $57, a payout of almost 133%.

What makes this trade enticing is the sentiment shift implied by the flashing of the 4-6-U sequence. Ordinarily, the chance that a long position in BTU stock will be profitable on any given week is only about 47%. Therefore, if the implications of the sequence pan out as projected, the bulls have an edge that market makers (on the opposite side of the trade) don't appreciate.

It should be noted, though, that the coal industry has been notoriously volatile. Should the above transaction work out profitably before expiration, traders may consider exiting the call spread early. While this does impact the value of the spread due to the remaining time balance, the wildness of BTU stock should be accounted for.

The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.

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