United States Steel Corporation (NYSE:X) has had a rough 2017. While it was much-loved as a “Trump play,” X stock has fallen by more than 50% since February. But while I’m not one for catching falling knives, I need a speculative play in my portfolio at the moment, so I’m going to attempt to catch this one.
Fundamentally, U.S. Steel has challenges, especially on the profitability front. However, the stock does look like a relative bargain from a price-to-book perspective.
X stock, as mentioned, is a Trump play, so it will benefit from the fiscal spending that the president promised. It’s also a direct beneficiary of the “buy American” message and using US-based resources.
Technically, U.S. Steel has shed a lot of froth, so this falling knife has a bigger proverbial handle to facilitate my task. But I still see risks. Whenever a company has losses, I worry about the dividend regardless of how small it is, because losing it causes selling. X is also near a long-term pivot point which needs to hold, else we could retest $14 levels.
To deal with those risks, I structured today’s set up to benefit even if the X bounce fizzles. I don’t need a rally to profit, so I’ll merely reach to catch the knife without actually doing it.
My thesis is simple. U.S. Steel shares have seen their lows for the year. I will sell downside risk but leave room for error. The trick is to find proven support levels where I expect buyers would step in to buy the stock on the next dip.
How to Trade X Stock
The bet: Sell the Oct $15 put for 65 cents per contract. Here, I have an 80% theoretical chance of success. But if price falls below $14.35, I have to own the shares and I start accruing losses.
Selling naked puts is risky and not suited for all investors. To taper the risk, I would use bull put spreads instead.
The alternate: Sell the $15/$14 credit put spread where the maximum risk is limited, yet I still have a chance at yielding 23%. Compare this with risking $21 to buy X stock with no room for error, which would then require a 20%-plus rally just to match the performance of this spread.
No thanks.
Selling options is risky business, so only risk what you’re willing to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
