How do we effectively play a stock that has been in the dog house when we think there is still upside potential?
Take for example Arch Coal (ACI). In 2013, it was a $70 stock. But, coal has fallen on hard times with the development of inexpensive and plentiful natural gas reserves and it now trades for less than $5.
IS THERE LIFE IN COAL?
Still, commodity assets have tangible value and with natural gas prices seemingly on the rise, coal may become more attractive.
ACI has been trading in a range largely between $6 and $4 since February. The extreme low sits at $3.47, which was made on June 24. Currently trading near $3.85, the $4 level is one to watch as weekly pivot support for the stock. Can the company go to zero? Sure. Is that likely? I would argue not and further, I would argue it’s not going to happen in the relative near future.
If you are comfortable holding on to this inexpensive stock for a potential recovery, then selling puts could allow you to collect income while you wait to get into ACI at a 12% discount.
RECOMMENDED TRADE SETUP
Sell to open ACI Nov 3.50 Puts at $0.20 or better. But remember, you should only sell this put option if you want to own ACI at a discount to the current price. If you are assigned the shares, a December covered call can be sold against the stock to lower your cost basis even further.
This cash-secured put sale would assign long shares at $3.30 ($3.50 strike minus $0.20 premium), which is about 12% below ACI’s current price, costing you $330 per option sold. If the put option expires worthless, you keep the $20 premium, earning a potential 6.1% return in 37 days. If ACI does not fall below the strike price before expiration, then you keep the premium you collected, essentially getting paid not to buy the stock.
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