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Patriot Coal Files for Bankruptcy

Written By Brian Hicks

Posted July 10, 2012

A week ago, I said:

Near term, coal stocks, like Peabody Energy (BTU), are likely to pull back after crossing that upper Bollinger Band.

We also have an overbought read on Williams % Range, and the latest spikes in MACD and DMI are unsustainable.

It’s likely stocks such as Peabody (BTU) will pull back from the runs.

This can be played by either shorting the stock or by buying an August 26 put.

At the time, the BTU August 26 put traded around $2 a contract.

Since then, BTU has pulled back under $23, sending the August 26 put above $3.70.

That’s an 85% gain in less than a week.

While further downside is likely on today’s Patriot Coal bankruptcy news, we believe coal will head higher over the long-term.

As we also reported last week:

Gregory Boyce, CEO of Peabody Energy (BTU), explains Chinese demand has been growing sharply in recent months. Demand for coal is expected to reach 285 million tons in China this year.

And China’s not the only nation that’s hungry for coal…

Boyce expects global coal use to run 25% higher by 2016.

Coal consumption is expected to explode in India as it continues to develop thermal power generation plans.

Europe is burning coal at its fastest pace in six years. European demand grew 3.3% last year as natural gas sales fell 2.1%. 

“Coal will continue to remain in the money in Europe because it’s more competitive to burn than gas,” says Barclays.

On the next BTU stock pullback, I’d buy the underlying stock as well as the January 2013 26 calls.