So BTU filed for Chapter 11. What to do now? Well, the equity is just about zero, so my position is now effectively only long the subordinated bonds. These are still trading in the 5.5 - 6.5 range (nice). I'm going to cut the position back now. When I had the cap structure position on (long bonds, short stock) it was a hedged bet. Now it's just a lottery ticket on the sub bonds being worth something. That depends on how much time the Court and the senior creditors give them. Coal prices probably will recover later this year, but it may all be over by then.
This is a great trade for someone willing to go through all the documents to see what avenues are open to all the remaining participants. This takes time and an ability to fight boredom. That's not me.