United States Steel Corporation (NYSE:X) stock has had wild swings in recent years. Just in the past 12 months, X stock rallied 170% and almost all but evaporated into mid-May. The move was on a better fundamental outlook from earnings reports combined with heavy political headline influences.
Fundamentally, X operates with negative net margin, so it’s hard to argue for value in its price-earnings. But it sells at a price-book under 2, so it is not likely to be a giant mistake to own it a bit lower than current price and therein lies my opportunity. I can generate income by selling risk under support level that should be value entry points in case price goes against my trades.
Furthermore, as long as the Trump trade is still alive, the expectations of fiscal spending should keep a put below the stocks who are likely to benefit from infrastructure build outs. United States Steel is one of those companies especially that the message is to “build American.” Keep in mind that I don’t need the actual projects to happen. We only need this perception to be there and the bids will remain below current levels in X stock.
Click to Enlarge A critical part of my strategy is that I am willing and able to own U.S. Steel shares lower than current levels.
Technically, X stock is in an ascending trend setting higher lows and I bet that if the macro remains largely intact the X trend continues. This means that the recent lows should hold and I can sell premium against them. I am going into this trade with recent profits in hand, which further gives me courage to do this into earnings.
But if X stock repeats its negative performance from April earnings then the stock could target $12 per share or lower. The bearish technical pattern could invite technical sellers to exacerbate the earnings move. In that case, I am confident owning the shares then managing out of them without major disasters.
There is upside potential since there is a giant open gap that could drag U.S. Steel stock up to $28 per share. This magnet could accelerate if X can rise above $24.6. Although this is not my main reason to go long X but it is an added benefit.
The Trade: Sell X Jan 2018 $18 put and collect $1.1 to open. Here I only have a 70% theoretical odds of price staying above my strike, so I can keep the entire premium for maximum gains.
Otherwise, I must own the shares at that price and suffer losses below $16.90. I could sacrifice some gains and buy cheap August or Sept $18 puts to temporarily guard against the crash scenario.
The Safer Way to Trade It: Sell X $18/$16 credit put spread where I have about the same odds of winning but with limited risk. If the spread is successful then it still yields over 25%.
Compare this with risking $24 here and hope that the stock rallies on the earnings event with absolutely no room for error. At least with my set ups, X can falls 25% from here and I still could come out a winner.
Investing is risky business otherwise we’d have no reward. But I never risk more than I can afford to lose.
Learn options as easy as 1-2-3 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.
