What a difference a few hours make. Yesterday United States Steel Corporation (NYSE:X) and AK Steel Holding Corporation (NYSE:AKS) were in freefall on the heels of AKS stock’s earnings report. This morning X is rallying over 9% on its own merit, and it’s not too late to join the party.
I am not a fan of chasing pops. Yet today I will be setting up a bullish trade on X. I am looking to benefit purely from the consistency of the stock price, not its upside potential.
I was lucky to be long into the report overnight, so I go into it with profits in hand. Nevertheless, I will still leave plenty of room for error. After all, equity markets are at all-time highs which is scary altitudes.
When stocks move this fast, most investor get caught watching and waiting for better entry points. A shooting star like X stock this morning is just as scary to catch as a falling knife, and that’s why I use options. There I can bend time a bit thereby limiting the need to be surgical with my entry points.
The sacrifice I make is that sometimes I limit my potential profit at the expense of tipping the odds in my favor. This is a sacrifice I gladly take for the sake of safety.
Fundamentally, I cannot argue for value with a price-to-earnings ratio for U.S. Steel stock above 150. These are levels that reserved for mega growth companies like Amazon.com, Inc. (NASDAQ:AMZN). Luckily price-to-book is below 2, which means that it’s not likely to be a giant mistake to own shares at a discount. This fact is important to my trading style.
Analysts on Wall Street price range for X is wide and leaves plenty of upside room. So the odds of a surprise downgrade is minimal.
Key to my strategy is to find levels that will remain support for the next few months. I will sell downside risk against them to raise cash. If they hold then I would have created income from nothing. To open the trade, cash goes into my account and I let time do the rest.
Click to Enlarge Technically, X stock has been trailing an ascending trend line which is the only technical threat that looms. But current price action shows no imminent reason to worry. I will hide below it to place my bet. This leaves me plenty of room for error.
The Trade: Sell the X June 2018 $19 naked put and collect $1 to open. Here I have a 75% theoretical chance that I would retain maximum gains. But if the price falls below my strike then I accrue losses below $18.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the X June 2018 $19/$17 credit put spread. The spread has the same odds but would deliver 15% yield on risk. Neither trade requires a rally to profit.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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 as @racernic on twitter and stocktwits.