Bet on dead vegetation with LEAPS calls
October nonequity idea
Green is the new red. All the hype surrounding energy transition is based on fairy tales. Nevertheless, tangible reality always prevails.
Coal is a prime example. Although it was dubbed a derelict energy source a few years ago, coal is here and will not disappear soon. One of the most loathed industries is more resilient and more critical than expected.
The more hated one industry is, the less the downside risk is, hence the higher the asymmetry. Look at the following chart (via
):
Coal outperformed all commodities, metals, and gold in the '70s by a wide margin. The present decade is reminiscent to some degree of the 70s. We have structural inflation driven by supply destruction in the commodity complex, tectonic demographic shifts, and wartime economy.
Higher inflation leads to higher labor, capital, and materials costs. Hence, building a new mine, ship, oil rig, etc., will cost more. Second-hand vessels, rigs, and complete mining projects will cost increasingly more, too. The eventual outcome is higher NAV for old-economy businesses.
Coal miners are perfectly positioned to benefit from current inflationary pressures. Moreover, coal mining encapsulates the meaning of an old-economy industry. So, how to take advantage?
Coal mining and options are the perfect match. Explosive movements characterize coal equities. The best way to harness impulsive price action is to use long calls. Using long calls, we benefit from price direction, magnitude, and volatility.
The missing ingredient is the timing. Is it time to act now?
Coal and coal equities did not perform impressively in the last 12 months. Coal price action is coiling. Look at the weekly chart below:
Price moves in range, forming a 15-month rectangle. A confirmed breakout above $150/ton would propel coal equities, too.
This is October’s non-equity idea for Pro subscribers. The topic is how to take advantage of the coal market via LEAPS calls. Before I discuss the idea, let’s review the coal market.
Coal market
The coal market is relatively complex. Unlike PGMs or uranium, it is not dominated by a few countries and companies. On the other hand, coal is an OPEX commodity. Buying coal is a must once you invest in a coal power plant or steel mill. CAPEX is optional, while OPEX is not.
In this chapter, I discuss the market's demand and supply of coal. But before that, let’s have a coal crash course.