Thanks to a period filled with political headlines, United States Steel Corporation (NYSE:X) stock has seen extreme moves. The range was so violent that it saw a 100%-plus rally that started last November largely evaporate. The spike started just after their earnings report then and was further fueled by the U.S. elections.
Last April, an earnings report was disastrous to the stock. U.S. Steel fell 30% in two days and 40% in total. It finally stabilized, but not before falling under $20 per share. Since mid-May, X stock has repaired its technical damage. It set a strong base behind consistent higher lows. It did this while knocking on a roof which is now a neckline to an upside opportunity.
Click to Enlarge Now it’s peeking over this neckline with a juicy open gap above. If bulls can break it, they can overshoot higher.
What makes this most exciting is that above $24.30, markets more often than not like to fill those gaps. So eventually, we could see X stock at $28, which is an additional 15% or more.
To capture the opportunity, I won’t buy the stock at face value and hope it continues higher. This strikes me as risky, especially after a 20% rally. I don’t want to be late to the party.
To mitigate my entry cost, I will sell downside risk below the base so I can be long for X for free. In fact, I already have profits in hand from my last trade on X that delivered profits out of thin air.
X Stock Trade Idea
The New Bet: Buy X Aug $25 call for $1.20 per contract. To win, I need the price to rally past my calls and sooner better than later because time is my enemy. Every day the stock idles, I lose value off my asset.
Luckily I can do something about this. Since the stock established a base, I can use that to generate income and pay for the out-of-pocket expense of the calls.
The Bank: Sell X Oct $20 puts and collect $1.30 to open. To win, I need the price to stay above my strike else I would own the shares and suffer losses below $18.70.
Selling puts is perceived as risky, but consider this. The worst case scenario of my set up is if X stock falls below strike then I own the shares. But that would be 14% lower than now. The alternative would have been for me to own the shares from $23.50 and have already suffered a 14% loss.
It is important to note that I can close any of these trades at any time for partial gains or losses. I am not required to keep them open through expiration. So even if price falls but stays above my puts, I can still profit. This is yet another reason why I prefer to sell options rather than strictly be a buy-and-hope trader.
Investing is risky, otherwise there would be no reward. However, never risk more than you are 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.