CCI had success trading Alpha Natural Resources in the past, and about a month ago re-entered the trade via selling one lot of $41 Aug puts. Unfortunately, since then ANR has gotten clobbered really, really hard. Some of the reasons include; the general market decline, perceived global slowdown and hence less demand for coal, and most importantly a poor earnings report. The stock declined to a recent low of $26 and one lot of shares was put to CCI at options expiration for a cost just under $40. Ouch.
When things fall this much, obviously the original thesis was not right. However, instead of just panic selling (although that is always an urge just to get rid of the pain), I looked into some fundamentals. The first thing that popped out at me was Yahoo Finance showed ANR book value at $37. In theory that means ANR is trading well under book value. That seemed to be too good to be true, so I looked a little deeper at the balance sheet. A lot of the book value is associated with good will from the Masse acquisition and other intangibles. However, by my math, just tangible assets represent a value of $26/share. This strikes me as a good support level for the stock. The market might agree with that because it appears to be where the stock bottomed in recent trading and the option volume around that strike is slightly elevated.
Last night, ANR announced a stock repurchase program. I'm not sure if that is really a long-term bullish sign, but at minimum it does seem like a good attempt to stop the slide of the stock.
Given the above information, CCI sold a lot of $26 Sept puts this morning for $1.08. That option premium will yield 4% if the stock stays above my adjusted book value over the next month.
By mid morning, the stock was up near $31 up 9% on the day. (Did I ever mention how much I love those rational markets). CCI figured this can't go on forever, so we sold a lot of Sept $34 covered calls against the shares owned for $1.01. That is about a 3% option premium.
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Entering a position at $40 in ANR certainly seems like a really bad decision.. In these situations the urge to panic sell or wildly double down exist. Hopefully these options trades represent a good balance between those two extreme choices. CCI is hoping the stock settles in somewhere between $26 and $34 and we can collect both premiums as a way of recouping some of the losses on this bad call.