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Option Tip – Friday, 7th October, 2011
JRCC



The option tip for today will be based around a bearish play on James River Coal Company (JRCC).

JRCC logo

Business Description

James River Coal Company mines, processes and sells bituminous, steam- and industrial-grade coal through six operating subsidiaries located throughout eastern Kentucky and one in southern Indiana.

JRCC mining

The Present Situation

The shares of James River Coal Company (JRCC) muscled higher on Wednesday, thanks to an upbeat analyst note. Specifically, Jefferies analyst Peter Ward opined that the months-long sell-off among coal stocks was unjustified, and that they're due for a rebound.

Against this backdrop, JRCC ended the session atop its 10-day moving average for the first time in about three weeks, though the stock is still staring up at its 20-day trendline. This moving average hasn't been toppled on a daily closing basis since late July, when JRCC was exploring the $21.50 vicinity. It is very likely that the security will surrender its recent gains and extend its longer-term quest for multi-year lows.

JRCC chart 100711



It would not be surprising if JRCC retreated below the $5 level -- into territory not explored since November 2007 -- within the next several weeks. However, the put cost is extremely high at the moment.

JRCC no4

In fact, the stock's Volatility of 101% registers in the 86th percentile of its annual range, implying that JRCC's short-term options are more expensive than usual at the moment.

From a sentiment standpoint, though, JRCC is no stranger to skepticism on the Street. For instance, Zacks reports that only two out of nine analysts deem the equity worthy of a "buy" or better endorsement. Plus, despite depleting by 7.4% during the past month, short interest still accounts for 26.5% of the stock's total available float. At the equity's average daily trading volume; it would take more than a week to repurchase all of these pessimistic positions.

According to Thomson Reuters, the consensus 12-month price target on the security stands at a whopping $16.50 -- more than double JRCC's closing price of $7.51 on Wednesday. Should the shares turn tail and continue their journey into new-low territory, a flood of price-target cuts could exacerbate the coal concern's slide. Obviously, the time to act is now, not when everyone is buying!

The Option Tip

The option tip surrounding James River Coal Company (JRCC) is to buy the November 5 put.

”Success is simple. Do what's right, the right way, at the right time.”



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