See my earlier post about CONSOL Energy and coal stocks in general (link: CNX Trade). Using the same fundamental approach, a similar bull put spread on Massey Energy (MEE) can be done as following:
- Buy to open April $44 puts
- Sell to open April $45 puts
Does it meet the 50-10-20 test?
5% - Check
10% - The cushion between $45 and current stock price of $50.29 is 10.5% - Check
20% - Max profit on above bull put spread is 0.2/0.8 or 25% before commission - Check
From a technical standpoint, MEE has almost perfect rising support line since early Oct'09. MEE has slightly higher beta than CNX because it is half the size of CNX market cap. MEE is ~2% shy of taking out 52-week high. A pull back to either 50-day moving average which is around $45 is not out of question, however with Tier 1 analysts warming up to coal sector, the stock might be ready to breakout further to the upside in coming days. Also, if you extend the rising support line, it is expected to be around $44.50 by April expiration.
Given that MEE has slightly higher beta in coal sector and, unlike CNX trade, the above bull put spread is not ideally below the rising support line, MEE has slightly higher risk profile than CNX. However, it still meets the 5-10-20 test and I like the odds given bullish fundamentals.
For more on my 5-10-20 rule, click here: 5-10-20 Rule
Good luck!
