Coal stocks are starting to attract substantial attention thanks to the Trump administration that strongly support the U.S. coal industry.
Most recently, President Trump signed an executive order directing Defense Secretary Pete Hegseth to enter into long-term contracts with coal-fired power plants across the country. The goal is to ensure that the U.S. military receive reliable electricity from domestic coal sources.
According to The New York Times, the order "directs Defense Secretary Pete Hegseth to enter into long-term contracts with coal plants across the country to power military installations. The move could provide financial support to dozens of coal plants that might have otherwise been set to retire in the coming years."
In addition to securing power purchases, President Trump also instructed the Department of Energy to allocate funding aimed at keeping coal plants operational in key states, including West Virginia, Ohio, North Carolina, and Kentucky. These regions are home to many coal-producing companies and related infrastructure, meaning the funding could have a direct and positive impact on industry revenues.
So, what’s the best way to trade the news?
Option 1: Buy Individual Coal Stocks
One way to trade this theme is by purchasing shares of individual coal companies that stand to benefit from increased government support and potentially higher demand.
Two examples include Peabody Energy (BTU), which is one of the largest coal producers in the world, with operations spanning multiple regions and coal types. Another is Hallador Energy (HNRG), a coal producer with operations primarily in the Midwest.
We’re going to do the same thing that the prudent insurance company would do. And it’s going to shock you how easy it is to do it! The strategy even has a name. The tool we’re going to use that duplicates this insurance/reinsurance business model is called a credit spread. We’re going to collect a premium, and then use a portion of the premium we’ve collected to cap our risk.
Let’s look at two examples. In the first example, let’s assume that it is May option expiration. We want to sell a strangle that has an 80% probability of profit. The OEX is at 671.76. We want to sell a call that is 5% above the current market price (705.35) and a put that is 5% below the current price (638.17). The call we want to sell is the 705 call, priced at 1.75 ($175). The put we want to sell is the 640, priced at 2, ($200). Our total credit is 3.75 ($375 per spread). Below is a graph of the short strangle.
Now let’s look at the trade using credit spreads. It is May option expiration; we are looking for a trade with an 80% probability of profit. We want to sell a call that is 5% above the current market price (with the OEX at 671.76, 5% above is 705.35) and simultaneously buy a call one strike price further out-of-the-money. Also, at the same time that we want to sell a put that is 5% below the current price (638.17), we want to buy one put one strike price further out-of-the-money. The call we want to sell is the 705 call priced at 1.75 ($175). The call we want to buy is the 710, priced at 1.25 ($125). The put we want to sell is the 640 priced at 2 ($200). The put we want to buy is the 635 priced at 1.25 ($125).
A Straightforward Approach to Trading Weekly Options
As stated in the Wealth Building with Weekly Options book, the strategy depends on locating liquid, high dollar, fast moving stock candidates. In addition, it is important to be aware of the overall market environment.
The content of this newsletter endeavors to support you and those strategy goals. The newsletter comes out on Wednesday evenings since Thursday is the day of new weekly option listings.
This week: Small caps lagged in the stock market Wednesday - but not by much - as Wall Street weighed a stronger-than-expected January jobs report and another day of broad-based outperformance by the IBD 5o index of leading growth stocks.
The Russell 2000 had rallied nearly 1% just after the open. But the small-cap index eventually reversed lower, losing 0.4% and testing its short-term moving averages. The Dow Jones Industrial Average, S&P 500, and Nasdaq composite ended flat to slightly lower. Volume was higher on both the New York Stock Exchange and the Nasdaq, but the Nasdaq composite’s 0.16% decline was too low to qualify as a distribution day.
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