Metal stocks are on the mend. Indeed, yesterday’s warmly received Federal Reserve announcement sent traders into big players like United States Steel Corporation (NYSE:X) in droves. And it’s about time. X stock, once a highflier, had been brought low. Since its July peak of $27.64, shares of the steel behemoth fell as much as 43% before this week’s bounce.
If you’re a volatility lover, the sudden strength in this steel stock is a welcome development. When X gets uppity, it’s a sight to behold. Look no further than its gargantuan run earlier this year. The ascent that carried U.S. Steel to the aforementioned July summit commenced when the stock sat at $6.
Skeptics will point out that X stock remains in a downtrend with falling 20-day and 50-day moving averages. Such is always the case in the earliest stages of a potential turnaround, however. Confirmation seekers can certainly wait for further signs of a bottom before initiating bullish trades.
The higher probability associated with today’s play will make it easier to pull the trigger, though.
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It’s worth pointing out the volume shifts transpiring during X stock’s recent turnabout. A pair of accumulation days cropped up this week suggesting the current rally has big backers. Watch for a higher pivot low to form during its next pullback to lend further evidence X is bottoming.
X Marks the Spot
Since volatility runs hot in United States Steel Corporation option premiums are always ripe for the selling. Couple that with the stock’s low price tag and our now bullish outlook and naked puts become a logical trade.
Sell the Oct 16 put for 30 cents or better. The reward is limited to the initial 30 cents and will be captured if X stock remains above $16 by Oct expiration. While $30 (30 cents x 100) doesn’t sound like much, the margin requirement should only be around $160 so you’re looking at a potential 20% return on initial cost.
By selling the put you obligate yourself to buy 100 shares of United States Steel Corporation for each contract sold if the stock sits below $16 at expiration. If you don’t mind accumulating shares stock there, then let the put ride if the stock drops. Otherwise, close the position to minimize loss if the stock drops below $16.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
