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Lets Do The China Coal Swing (KOL)

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Let’s start with a peek at a couple of open trades.

Just under two months ago, in Financial Stocks for the Home Stretch, we advised a zero premium pairs trade employing the Financial Select Sector SPDR ETF (NYSE:XLF) and the SPDR Dow Jones Industrial ETF (NYSE:DIA).  We bought CALLS on the financials and sold them on the Dow for the same price.

That was November 12th.  Fast forward to today’s post-fiscal cliff reality, and the difference between the two has grown to an impressive $59 in our favor.

Again, we’re going to split this one between the prim and the savage.  For those of you more conservative in their bearing – or who wrote upwards of thirty or forty pairs on the trade – we suggest you close out now and take your funds.  For those who still believe there’s room to run and are more the gunslinger type, feel free to hang on.  You have until the third week in March to play it.

We’ll continue to monitor and wish you the best of British luck.  But we’re personally closing out here.

Next on the Docket –

Last week we recommended a trade that one of our readers was quick to (correctly) point out was offered without a great deal of analysis.

What we did offer was the following;

As we’ve alluded here recently, the current fiscal cliff impasse is merely a mask, postponing a very strong desire on the part of American investors to reload their U.S. equity guns and start firing.  It will take nothing more than the appearance of a solution to the cliff issue to allay investor fears and get them swallowing glutton-like the equity mutton once again.  And when they do, watch the financials fly.  Every strong recovery was good to the financials.

With that as our premise, we recommended you buy CALLS on MBIA, arguably the most volatile of all American financials and also the firm most sensitive to general sentiment surrounding the soundness of the financial system.

When a last minute deal brought the ‘fiscal cliff’ issue to a close (oh, would that it were so), we saw exactly the response we expected.  The markets blew higher, the financials rocketed and MBIA went bullgasmic.

We bought the option for $1.11 and last Friday it was fetching $1.83.  That’s a one week profit of 65%, and that’s fine by us.  We’re jumping ship and banking our winnings.  No looking back.

MBIA is one company we’ll return to in the future – that’s guaranteed.  This is a stock that flies like almost no other.

Arch Coal Update

We’ve twice written covered CALLS on coal producer Arch Coal Inc. (NYSE:ACI).  In the first round we pocketed a nice 24% gain over three months, and the second, which is still open, looks to be headed in a similar direction.

We’ve now written CALLS twice on this second initiative, the latest of which will either expire in ten days, or close our trade profitably altogether.  At this stage it’s hard to figure which way it will go, but we’re certainly trending toward the latter.

Our adjusted cost base for the shares is $6.76, and ACI shares are now trading at $7.66.  That is, we’re now 13% ahead, and if the shares keep rising and are called away (at $8.00), we’ll be up a very comfortable 18%.

We’ll keep you posted.

ACI is not the only coal company rising.  The whole sector looks to be on the move, largely on confidence that the China story has taken a turn for the better.

Last week we discussed China at some length, and this week we continue a tad with an emphasis on heavy industry.

We see it all rather simply – a stronger China means more manufacturing and more steel production and more coal to energize the whole.

Have a look at coal over the longer term.

This is a weekly chart of the Market Vectors Coal ETF (NYSE:KOL), a fund that’s comprised of most of the world’s biggest coal mining concerns.

After running up steeply in late 2010, the coal miners topped out and began a 20 month decline that looks only now to be terminating (red line).  Recent action from the RSI indicator is constructive, having poked above its waterline for the first time since the summer of 2011 (red box at bottom).  MACD, too, is rising, and looks on course to surface above its own waterline sometime in late January, at the earliest.  That would be the best bull signal any coal lover could hope for.

In the meantime, we’ll have to have penetration above resistance at $26.35 – a shade above our current price level – in order to have anything truly in hand (blue line).

All in all, though. It looks very promising.

Here’s the daily chart for KOL since the bottom began to form back in May of 2012.

The daily chart shows a divergence between half a year of flat price action, on the one hand, and rising RSI and MACD indicators on the other (blue lines).  That’s a bullish sign.  It’s also bullish that both indicators are now situated above their waterlines.

Despite the numerous failed attempts to punch above the roof at $26.35, we’re encouraged by the short-term and 137 day moving averages, both of which are now beginning to ‘scoop’ price (in black).  This last indication gives us confidence that resistance will be cracked imminently.

It All Comes Down to China

With all indicators pointing toward an ongoing Chinese expansion, including the closely watched electricity demand and overall industrial output numbers (see chart below), there’s every reason to believe that coal demand will soon reignite.

 

And we’re going to open a new trade based exactly on those expectations.

We’re selling a PUT spread just below the scooping moving averages and using those same funds to buy a CALL.  Do it is many times as you like.  It’s free.

Maximum loss on the trade is $200 per trio traded.

 

Wall Street Elite recommends selling the KOL April 24 PUT for $0.75 and buying the April 22 PUT for $0.40, for a total credit of $0.35 per pair – then using those same funds to purchase a KOL April 30 CALL for $0.35.

 

With kind regards,

Hugh L. O’Haynew, Senior Analyst, Oakshire Financial

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Comments

3 Comments on "Lets Do The China Coal Swing (KOL)"

  1. Doug on Mon, 7th Jan 2013 6:51 PM 

    The maximum loss if KOL is $22 or below at expiry would be $2. One must be aware of that risk when determining trade size. When would you bail on this trade to minimize the loss if it went against you? Just curious if you have a bail-out plan. Thanks
    BTW, I agree with your chart analysis. It looks ready to blow. So if that turns out to be the case the above will be moot. Still it’s good to have a contingency plan just in case. Don’t you agree?

  2. Anthony on Tue, 8th Jan 2013 7:57 AM 

    We are interested in this trade and will try to execute it as planned today.

  3. Tim on Tue, 8th Jan 2013 9:59 AM 

    I agree that KOL is looking strong, but I’m not a huge fan of this trade structure. As Doug pointed out, the risk is $2 per trio traded. So, taking in .35 with a risk of $2 (becasue the .35 is used to buy the call). Then, I’m not big on buying calls that are 14% out of the money. I am putting on the APR 26-29 call spread for $1.20 or less. This has a higher probability of being profitable and can turn $1.20 into $3 if KOL goes to 29 by APR. Breakeven is 27.20.


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