Forget Santa. The Donald Trump rally is “steeling” the seasonal festivities in 2016 and nowhere is the “ho-ho-hopeful” behavior more evident than United States Steel Corporation (NYSE:X). Now it’s time to fade the popular narrative in X stock using a low risk, “bear-to-bull” put butterfly spread.
X stock and steel plays Nucor Corporation (NYSE:NUE), AK Steel Holding Corporation (NYSE:AKS) and Steel Dynamics, Inc. (NASDAQ:STLD) have been on fire technically since last month’s Presidential shocker. Trump’s platform of renegotiating ‘terrible’ trade deals and finger pointing at China’s dumping of cheap steel on the U.S. market has unsurprisingly forced a bid into X stock and other steel plays.
As the story goes, campaign trail tough talk will undoubtedly lead to equally forceful and successful action once Trump is given the keys to the Oval Office.
As well, a forward-looking and optimistic ‘let’s give him a chance’ bid, Rust Belt pledge of putting “American-produced steel back into the backbone of our country” and promised infrastructure improvement are of particular benefit for X stock and the steel industry.
But no matter how bullish and receptive you are to Trump’s plans, a full month into the historic and “ho-ho-hopeful” rally, it’s time for a reality check on the X stock price chart.
X Stock Weekly Chart
Saying the company has had a good month since the election results is an understatement.
Shares of U.S. Steel stock are up 65% since Nov. 8. At last week’s high, X stood even stronger with a gain of 85%. However, the excitable gain in X stock does appear to be setting up for additional profit-taking against the backdrop of Fibonacci-based pattern resistance and overbought conditions.
Specifically, a two-step or mirror move formation where leg AB matches the dollar movement of leg CD completed recently near $37 in U.S. Steel. There may also be an Elliott Wave that’s finished its 5 step wave count.
Formal practitioners of Elliott Wave may cringe or scoff at my detailed count shown in the daily chart of X stock. That’s okay by this strategist. More important, after five weeks of price action pushing through the upper Bollinger Band and a bearish shooting star candle pattern above channel resistance, there should still be agreement that X stock’s Trump rally has run its course.
X Stock Bearish (into Bullish) Butterfly Strategy
Given what’s been said, a bearishly positioned, long put butterfly is an interesting trade candidate in X stock. The butterfly strategy is positioned to profit on price weakness in X stock for a range of prices. If shares experience a strong correction, the spread also sets itself up as a way to buy U.S. Steel shares at a substantial discount to current levels.
One such spread which fits is the U.S. Steel stock Weeklys Jan 6 $32/$30/$28 put butterfly. Priced for 25 cents with X at $34.78 the position risks the small debit at expiration if shares are above $32 or below $28.
If X moves lower and into the confines of the spread during the butterfly’s life, the trader can expect to realize some profits. This makes sense as the butterfly is really a $32 / $30 bear put spread that’s largely financed by the lower $30 / $28 bull put spread.
By paying 25 cents for the butterfly, the max return is $1.75 at $30 on expiration. Were that to occur, the bearish vertical spread would expand to $2, while the lower bullish vertical would expire worthless. Accounting for the debit, the trader is left with a profit of $1.75. Having said that, the perfection required makes this outcome a longshot at best.
What about getting long X stock at a discount through the butterfly? Since this “bearish” butterfly is short two $30 strike puts, assignment and the opportunity to buy X stock is certainly possible.
If assigned at $30, purchasing X stock would amount to buying into the name for roughly 14% below current prices. Even better, the worst entry point from this conversion into U.S. Steel shares actually works out to $28.25 or nearly 19%, and never more than 25 cents above the market price if X tanks below $28 a share.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.