Shares of United States Steel Corporation (NYSE:X) are starting to lose their momentum following the epic 70% rally following Donald Trump’s presidential victory. While The Donald certainly will lead a more friendly administration for steel and steel companies generally, the magnitude of the move has more than reached an extreme. I expect U.S. Steel to retrace some of the fast money gains over past few weeks, with X stock pulling back toward the $25 level by year end.
Here’s how we can make a little money off this.
X Stock Charts
Since making an intraday low of $17.05 on Nov. 2, U.S. Steel stock has nearly doubled in price this month, trading up to $33.78 on Black Friday before pulling back.
Yesterday’s price action was evidence of an exhaustion in the rally, as X stock attempted to make yet another all-time high before succumbing to selling pressure and closing sharply lower on the day. This failure is usually emblematic of a short-term top in shares.
X stock is also extremely overbought on a 14-day RSI basis, with readings over 80.
Previous instances when U.S. Steel had similar levels of euphoria proved to be very opportune times to take a short position in the stock.
Looking at the MACD histogram, which is a measure of momentum, shows that shares of X are finally starting to lose some momentum after the monster rally. This is also a usually reliable indicator that U.S. Steel may be poised for a pullback.
As an option analyst, I use implied volatility (IV) as a cornerstone of my trading decisions. With IV at only the 4% percentile, option prices are really cheap. Low levels of IV are also a sign that complacency has set in, which has proven in the past to be a prescient indication of a top.
So with X stock overbought and overloved, and with momentum finally waning, I think a short-term pullback is in the offing. While I normally favor spread positions over outright option buys, with IV at such low levels, I think a straightforward put purchase is the way to play.
Trade Idea on X Stock
Buy to open X Jan $32 puts at $2.80.
These are the traditional monthly options that expire Jan. 20, 2017. The maximum risk on the trade is the premium paid of $280 per contract.
I would look to take partial profits if X stock reaches the minor support level of $29. The ultimate price target is the $25 level. Since options are a wasting asset, I would use a time stop and look to trim out of some of the position by mid-December if X fails to hit either profit objective.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
