Options Update: Option Players Look for a Little Consol Energy

• July 10, 2008
• Mark Fightmaster

Energizing News

Lehman Brothers provided the news for today’s focus stock, upping Consol Energy’s
price target to $110 from $90. The brokerage added an “equal weight” reading into the mix, which was a reiteration of their current position. While this price-target elevation is quite a jump, it is still short of the consensus 12-month price target of $112.79. With the stock trading slightly south of $94.50, the price target indicates that analysts believe the future is rosy for CNX.

Thanks to this morning’s brokerage decision, CNX if more than 2% higher. The stock’s rising price prompted some heavy option activity, which is what caught my eye today.

According to today’s Intraday Volume Explosion List, puts are the option of choice when it comes to CNX. The energy firm has seen 19,937 total puts trade thus far, which is 15.5 times the activity of a normal day. Of this total activity, 11,695 of the contracts traded have crossed on the August 85 put (CNX TA). With no other contract coming even close to CNX TA’s level of volume, I’m guessing that this out-of-the-money action is either a bet for a sizeable drop, or the liquidation of current positions. Let’s see.

I uncovered both of these scenarios when digging through the activity on CNX. At 9:51 AM EST, a block of 4,016 contracts crossed the tape at the ask price of $6.60. That is a rather hefty bet that CNX is going to drop to $78.40 (strike price less the premium paid per contract) in order to break even. Putting the stock’s price at $94.50, a 17% haircut by August expiration (August 15) – a big drop. The block of that was more than likely liquidated crossed at 10:07 AM EST and consisted of 3,459 contracts.

Potential Energy

According to Zacks, CNX receives a healthy amount of optimism from analysts, but there is still a chance for upgrades. Yes, the equity receives 5 “strong buys” and 2 “buys,” which could lead to it getting smacked by downgrades. However, there is a chance for upgrades as well, as 5 analysts rate CNX a “hold” or worse.

The true upside potential comes from the option pits. CNX’s current Schaeffer’s put/call open interest ratio (SOIR) of 1.33 ranks at a 52-week high. This extreme level of pessimism indicates that there is a great deal of money sitting on the sidelines waiting to get into the game on CNX. Moreover, this extreme pessimism would be significant if the stock was a solid performer … so let’s take a look at the equity’s technical prospects.

Energized Performance

We could be dealing with contrarian gold here, heavy pessimism (from option players) toward a strong performer. During the past 52 weeks, CNX has advanced 98% – which is enough to make anyone ignore the stock’s recent 2-week pullback. Speaking of this pullback, it has given the stock a chance to test the support of its 20-week moving average. This trendline has held up in the past, failing only once since the middle of September 2007.

In addition to the potential trendline support, CNX is trading north of the round-number 90 level. The equity found resistance at this level during its ascent, so it could now find support there. In addition, 90 is the site of peak put open interest in the July option series – meaning that it could act as support as the month winds to an end. The mantle of peak put option moves down to the 75 level in August, but there is time for that to change … especially in light of today’s action. Nevertheless, all of the heavy put open interest is out of the money, meaning that it could eventually lend support.

The Verdict? I find it hard to argue against the case that Todd Salamone made in this week’s edition of Monday Morning Outlook. Mr. Salamone noted: “Coal companies such as … Consol Energy (CNX) have seen their shares shake off weakness from the first quarter and resume their uptrends along support at their 10-week and 20-week moving averages.” Wow, hard to argue with that reasoning … especially since it supports my thoughts on CNX 100%.

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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