Saturday, March 12, 2016

Peabody Energy Follow-Up

The lottery ticket on BTU has worked pretty quickly. Prices are all over the place on this near-
Chapter 11 bond, but I think the offer has gone up to about 7 1/2. I wrote some calls on BTU equity against the position. The logic in this trade is very strong; if the bonds are worth almost nothing, the stock should be worth absolutely nothing. However, there are only a limited number of shares available to short. When this happens, people resort to buying options, and vols go up. The vol of the calls is about 230%; the puts about 300%!

Additionally, rumor has it that there is a big fund with an existing long bond/short equity trade. He is already sucking wind, and may be forced to blow out. We will see.

1 comment:

  1. Thanks for sharing. The risk management strategy seems to make sense.

    Off-topic I suppose, but I cannot help when seeing the name 'Peabody' to think of a song by one of my favourite country-folk singer-song writers John Prine from his self-titled album released in 1971.

    Lyrics pasted:

    ©John Prine

    When I was a child my family would travel
    Down to Western Kentucky where my parents were born
    And there's a backwards old town that's often remembered
    So many times that my memories are worn.

    And daddy won't you take me back to Muhlenberg County
    Down by the Green River where Paradise lay
    Well, I'm sorry my son, but you're too late in asking
    Mister Peabody's coal train has hauled it away

    Well, sometimes we'd travel right down the Green River
    To the abandoned old prison down by Airdrie Hill
    Where the air smelled like snakes and we'd shoot with our pistols
    But empty pop bottles was all we would kill.

    Repeat Chorus:

    Then the coal company came with the world's largest shovel
    And they tortured the timber and stripped all the land
    Well, they dug for their coal till the land was forsaken
    Then they wrote it all down as the progress of man.

    Repeat Chorus:

    When I die let my ashes float down the Green River
    Let my soul roll on up to the Rochester dam
    I'll be halfway to Heaven with Paradise waitin'
    Just five miles away from wherever I am.

    Repeat Chorus:

    Paradise notes

    "I wrote it for my father, mainly so he would know I was a songwriter. Paradise was a real place in Kentucky, and while I was away in the Army in Germany, my father sent me a newspaper article telling how the coal company had bought the place out. It was a real Disney-looking town. It sat on a river, had two stores, and there was one black man in town, Bubba Short, who looked like Uncle Remus and hung out with my Granddaddy Hamm, my mom's dad, all day, fishing for catfish.
    Then the bulldozers came in and wiped it all off the map.
    When I recorded the song, I brought a tape of the record to my dad; I had to borrow a reel-to-reel machine to play it for him. When the song came on, he went into the next room and sat in the dark while it was on. I asked him why, and he said he wanted to pretend it was on the jukebox." ~John Prine


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