Call Options Or Put Options On Alpha Natural Resources (ANR)?

| January 9, 2013 | 0 Comments

coalAlpha Natural Resources (ANR) is a leading producer of thermal and metallurgical coal.  They operate 145 mines and 13 preparation plants in the US and produced 106.3 million tons of coal in 2011. 

ANR currently trades for $9.90 per share.  The shares are up 88% from the 52-week low of $5.28, but they’re still down 58% from the 52-week high of $23.68. 

Is this an opportunity to buy call options on ANR as coal prices rebound?  Or should you buy put options on ANR as demand for coal softens? 

The bulls make a convincing argument…

There’s no doubt falling prices and soft demand for coal hurt ANR over the last year. 

But coal fundamentals are actually improving…

Coal stockpiles at US power plants have been worked down from the highs last summer.  And the improvement in China’s economy is giving demand a much needed boost. 

What’s more, deep cuts in coal production have reduced the amount of coal available.

Put simply, more demand and less supply should drive coal prices higher in the weeks and months ahead.  As coal prices increase, ANR should see sales rise and losses narrow.

More importantly, the stock looks bullish from a technical standpoint.

A new uptrend has emerged in ANR.  It’s set a series of higher highs and higher lows off the September lows.   And it recently made a bullish crossover of the 200-day moving average.

The improving fundamentals and bullish technical setup should lead to further stock price gains in the weeks ahead.

But the bears have a compelling case as well… 

ANR has made a nice recovery off the 52-week low.  But the fact is the entire coal industry is still in trouble

As you know, the majority of coal mined in the US is used to create electricity.  But coal fired power plants are quickly being replaced by ones that use natural gas. 

And for good reason…

The US has an abundance of cheap natural gas.  It burns cleaner than coal so it has less impact on the environment.  As a result, more power producers will continue to make the switch from coal to natural gas as the government pushes their ‘green’ initiatives on the industry.

Finally, the resurgence of the Chinese economy does bode well for coal demand.  But not necessarily for ANR.  Coal producers in China and Australia will be the ones who reap the rewards of greater Chinese coal demand.

At this point, it’s clear that the current governmental regulations and the massive supply of cheap natural gas will continue to undercut any improvement in coal.  And that’s likely to lead ANR lower in the weeks ahead.

If you think the bulls are right, take a look at buying the ANR March 2013 $10.00 calls for around $1.00.

If you think the bears are right, take a look at buying the ANR March 2013 $10.00 puts for around $1.10.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.