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"Risk comes from not knowing what you're doing" Warren Buffett I look and sift the world for such misplaced bets. When I occasionally find one, I first exploit it for profit. Then, I write about it for anyone else interested in such ideas. Twitter: @unemon1 Scribd:... More
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  • Traders Expecting Short Term Upside Potential In Coal Stocks?

    Historical Price Action Comparison and Options Trading Activity suggest over-leveraged-coal companies might be soon forming a bottom.

    ACI (-79.51%), ANR (-72.65%) and WLT (-96.77%) have lost more of 80% of their PPS value since the start of 2013.

    Simply by looking at their Financial Statements, it is appears pretty obvious that the recent price performances or each own company do reflect the increasing chances of Bankruptcy filing before the end of this commodities/coal downturn cycle.

    There are however 2 Factors suggesting a short term rebound might be in the cards:

    1. Recent Price Action compared to Historical Precedents.
    2. Options Trades suggesting a short term bullish sentiment.

    I - Recent Price Action compared to Historical Precedents

    Walter Energy (NYSE: WLT)

    The two previous down-legs recorded an average PPS drop of approximately 75%. WLT has sold off 77% over the past 2 months

    Arch Coal (NYSE: ACI)

    The two previous down-legs recorded an average PPS drop of approximately 50%. ACI has sold off 58% over the past 2 months (first down-leg was 56.34%, back in the H1 of 2013)

    Arch Coal (NYSE: ANR)

    The two previous down-legs recorded an average PPS drop of approximately 58%. ANR has sold off 59% over the past 2 months.

    II - Options Trades suggesting a short term bullish sentiment.

    The ANR Case - Friday October 10, 2014:

    And here an overview of the singles trades:

    Of course, the 2 x 10,000 Put contracts trades immediately caught my attention (10,000 contracts = 1m Shares). Someone:

    1. Went long 10,000 Put Contracts with $1.5 Strike and January 2016 Expiration (LEG1)
    2. Went short 10,000 Pt Contracts with $2.5 Strike and January 2015 Expiration (LEG2)
    3. … collecting $250,000 worth of premiums from the trade

    This is the Pay-off profile of the Trade at the Expiration of LEG2 / January 2015

    Clearly the trader will benefit from a price increase over the time period between today and the January 2014 Options Expiration Date. In the case ANR were to go BK before the January 2015 (LEG2) expiration, the trader would stand to book a loss of approximately $750,000. This would represent the worst possible scenario for the Trade

    While short term bullish, the Maximum pay-off of this trade (if held till expiration of each respective LEGs … would be achieved in a scenario where ANR were to close above $2.50 at the Expiration of LEG2 (January 2015) … and subsequently going into Bankruptcy before the expiration of LEG1 (January 2015).

    In this case, the Pay-off profile of the trade would be as following (+$250,000 Premiums cashed when the trade was implemented):

    So, in the best case Scenario (ANR >$2.50 at LEG2 Expiration and ANR in Bankruptcy before LEG1 Expiration) the trader would stand to book a $1,750,000 profit. Not so bad ... right?

    In this trade we have 3 possible extreme Scenario:

    • $1.70 will be an all-time low for ANR and prices will settle above 2.50$ before January 2015 (LEG2 Expiration) and stay above $1.50: Total Pay-off = $250,000
    • ANR will go BK before January 2015 (LEG2 Expiration): Total Pay-off = -$750,000
    • ANR will bounce back and close >$2.50 at the LEG2 Expiration (2015) and subsequently collapse during the course of 2015 (NYSE:BK) before January 2016 (Expiration LEG1): Total Pay-off = $1,750,000

    The trade is clearly a bet on ANR bouncing back in the coming 2 months and then … either SURVIVE or going into BK by 2016 (Jan 2015 - Jan 2016).

    Were ANR to continue it decline over the coming 3 months (before LEG 1 Expiration) let's say to $1 … and subsequently close at prices > than $1.50 at LEG1 Expiration? Then the trade payoff would be -1,250,000.

    The following table summarizes the Trade Pay-off as a function of ANR price at both LEGs Expirations:

    How the to read the table: If ANR closes at LEG2 (Jan 2015) expiration at $1.6 and then closes at LEG1 (Jan 2016) expiration at $1.9 the trade payoff will be -$650,000

    This trade will be unprofitable under any circumstances if ANR PPS will close at a Price < $0.75 on LEG2 (January 2015). Maximum Profit is $1,750,000 and theoretical maximum loss -$2,150,000.

    Clearly the execution of this trade express expectation of a short term bounce in ANR PPS, likely to prices >$2.25 (+32.35% upside) before LEG2 Expiration (Jan 2015).

    Of course, we are talking about American options and therefore, the theoretical maximum loss can be minimized by exiting the trade in the case of an adverse movement (between not and Jan 2015). Also in this simple analysis I did not take into consideration options' TV … but hey … I was just trying to present the basics.

    Similar (but smaller) and trades were placed on WLT (even if the trades had a higher exposure in case of BK). Options Activity on ACI has been very limited (both bearish and bullish).

    Oct 10 10:09 PM | Link | Comment!
  • Let's Give Walter Energy A Last Chance (NYSE: WLT)

    Rebar prices bottoming in China, Increasing slightly during the first week after week-long holiday.

    The price movement in Chinese domestic market in the remaining days of the week will set the tone for the month and also decide the fortunes of global steel sector as the unabated price slide for long has depressed the sentiments all over and this spark was long awaited

    Given The Recent Sell-Off ... and the fact that Rebar pricing might be considered as a leading indicator of other related assets prices ... at these prices ... I am willing to give WLT a Chance.

    Keep your Stops tight ... and ... don't get married to the name ... There is the risk you will become a widower after only a few months into the new marriage.

    Pretty strong correlation between Rebar Prices and WLT PPS:

    Disclosure: The author is long WL.

    Additional disclosure: at a price of 1.73

    Oct 10 8:20 AM | Link | 2 Comments
  • Quest Resources Holding Corp (QRHC): Valuing Its Own Shares At An Almost Negative Price? Desperate For $$

    The news:



    - Prices $18.0 Million Underwritten Public Offering

    Quest Resource Holding Corporation announced the pricing of a $18,000,000 underwritten public offering consisting of 9,000,000 shares of common stock at a price per share of $1.99, together with warrants to purchase 9,000,000 shares of its common stock at a price per warrant of $0.01 ("Warrants"). The Warrants may be exercised for a period of five years at an exercise price of $2.50 per share. We have also granted to the underwriters a 45-day option to acquire up to 700,000 additional shares of common stock and/or up to 700,000 additional Warrants to purchase common stock. After the underwriting discount and estimated offering expenses payable by the Company, we expect to receive net proceeds of approximately $16,300,000, assuming no exercise of the over-allotment option, and $17,600,000 assuming full exercise of the over-allotment option. The offering is expected to close on September 24, 2014.

    Maxim Group LLC is acting as the Sole Book Running Manager

    .... "

    Knowing the Closing Price on 09/18/2014 was $3.54 per share ... this morning the Company announced a $18,000,000 financing deal, where it issued

    • 9,000,000 common stocks
    • warrants to purchase 9,000,000 with Maturity in 5 yeas and Exercise price of $2.5 / share

    ... in Exchange of $18,000,000.

    With a Closing Price of $3.54 per share, the 9,000,000 warrants issued by the company (Exp 2019 / Strike $2.50) had a Fair Value of $23,446,092.32.

    • The resulting implied Fair Value of the 9,000,000 common shares (implied in the recent Financing Deal) is therefore NEGATIVE

    $18,000,000 - $11,591,82.46 = $6,408,137.54

    The Deal Valued QRHC Shares at $0.7120 each!

    Out of Simplicity I omitted the Borrow Cost (JBLUMBERG) and used the pre-announcement Volatility. This is a re-edited version.

    Tags: QRHC
    Sep 19 10:54 AM | Link | 3 Comments
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