Ever since the election, steel stocks have been going bananas. The specter of inflation is driving money into everything from United States Steel Corporation (NYSE:X) and AK Steel Holding Corporation (NYSE:AKS), to Nucor Corporation (NYSE:NUE) and Steel Dynamics, Inc. (NYSE:STLD). Bulls haven’t just established a foothold. They already have thriving communities in the space.
And yet, this week the inescapable pull of gravity finally reached high into the sky to pull the steel sector down a few pegs. This, friends, is a good thing. X stock and crew were extremely overbought, begging for a pullback to usher them to safer levels. And by safe, I mean prices closer to support zones. These areas provide lower-risk entries for spectators wanting to get in the game, but loath to chase.
The multiday drop has carried X shares back to the rising 20-day moving average. This popular trend-following indicator is often the first line of defense for bulls. Consider it a gathering ground for the most aggressive dip-buyers looking to grab shares at a slight discount.
While United States Steel Corporation shares may need a bit of backing and filling before advancing anew, the time to analyze trading opportunities is now.
This week’s pop in fellow steel stock AKS is exactly what we’d like to see in X shares moving forward.
X Marks the Spot
Option premiums tend to run hot for X stock due to its higher level of overall volatility. That, coupled with its lower stock price, make a naked put play attractive here. If you’re comfortable betting X stock remains above $31, you could sell the Jan $31 put for 85 cents.
You will pocket the max reward of 85 cents if the put sits out of the money at expiration. By selling the put, you obligate yourself to buy 100 shares of the stock per contract sold. If you’re a willing buyer in the $31 zone, you could allow assignment if X sits below $31 at expiration. Since you received 85 cents up front, your effective purchase price would be $30.15.
Traders wishing to sidestep assignment could exit the trade if X falls to $31.
At the time of this writing, Tyler Craig didn’t hold any positions on any of the aforementioned securities.
