Options Update: Option Activity Heats Up on Massey Energy

• August 1, 2008
• Mark Fightmaster

Energizing Results

Shares of Massey Energy
are more than 5% higher this afternoon, thanks to the company’s strong earnings report and forecast. Late yesterday, the Virginia-based company announced a second-quarter loss of $1.16 per share, but noted that a one-time charge of $245.3 million greatly impacted the results. Taking the charge out of the picture, MEE earned $1.15 per share, handily beating the consensus estimate of 76 cents per share.

Looking ahead, MEE upped its expected average coal price for 2009 to a range of $84 to $92 per ton. Earlier forecasts called for $65 to $74 per ton. For 2010, MEE now expects a range of $115 to $132 per ton for coal, up from $75 to $87 per ton. All of these factors contributed to today’s jump, which sparked heavy option activity and caught my eye today.

According to today’s Intraday Volume Explosion List, MEE is in the midst of seeing rather heavy option activity in both the put and call spectrums. Total put activity has increased more than 3.5 times the norm, with 5,599 contracts crossing. Of this activity, the August 55 put (MEETK) has seen the heaviest activity, with 1,700 contracts. On the call side, total activity has increased nearly 3 times, with the August 80 contract (MEEHP) seeing the brunt of the activity.

Digging into the activity, I found no remarkable transactions. This does not indicate that I am lazy; it indicates that most of the activity was comprised of smaller investors trying to capitalize on the stock’s move, or abandon losing positions. With the 80 call out of the money, odds are that the positions are new calls, but it is not a certainty. As for the way out-of-the-money 55 puts, best guess is that these are the liquidation of losing positions.

Coaled-Hearted Sentiment

Analyst coverage affords some opportunity for momentum. According to Zacks, MEE receives 5 “strong buys,” 5 “holds,” and 1 “strong sell.” While the 5 analysts deeming the stock a “strong buy” could issue downgrades, MEE’s technical prowess certainly suggests that upgrades are more likely. However, we will deal with that momentarily.

The horrifying “coaled-hearted” pun begins to come into play when we deal with option players. MEE’s Schaeffer’s put/call open interest ratio (SOIR) of 0.90 suggests that puts are in near parity with calls in the front 3-month option series. While the percentile ranking of 61 doesn’t suggest rampant bearish feelings (nor does it justify the use of the pun), it is the fact that puts nearly equal calls that suggests we could see an unwinding of pessimism.

That said, the true pun justification (punification, if you will) is in the form of short interest. Currently, nearly 11% of MEE”s float is sold short. Should this sentiment unwind following today’s earnings report, we could see a substantial short-covering rally. Furthermore, we could see this bearish sentiment continue to build, heightening the chance for such a rally.

Pure Energy

Wow, a horrible pun to a gratuitous Information Society reference, I truly know no bounds! That said, MEE’s performance is truly remarkable. The king of coal has advanced 108% on a year-to-date basis, and 268% spanning back to the past 52 weeks.

That said, the shares face overhead resistance in the form of the round-number 80 level. MEE is in this position thanks to a retreat from resistance in the 95 region. While the equity could find support from its 10-month moving average, it is a far drop before this support would come into play. In fact, the 55 put would then be an in-the-money position. Pegging MEE’s price at 79, the drop would be roughly 31% before the 10-month moving average would come into the picture.

For this reason, we are going to look at a weekly chart of MEE. Notice that the stock is currently positioned atop its 10-week trendline. This moving average is acting as support after the shares bounced off of support at their 20-week moving average. Since the beginning of September 2007, the equity has finished below the twin titans of support 3 times. Watch for these trendlines to step up and provide the impetus for a continued advance.

The Verdict? I can’t help myself, ladies and gents, I will leave you with this simple pun to sum up my feelings for MEE. MEEthinks we may be looking at a stone-coaled contrarian bullish lock … sorry.

If you have any questions or comments, make sure to email me. I will do my best to answer your question or address your concern.

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