Spiking oil prices are stealing the headlines, but crude isn’t the only commodity rocketing to the moon. Inflationary forces have a broad array of metals ripping as well. We saw momentum traders and other opportunity seekers making a mad dash into metal stocks this week.
While increased input costs have some worrying about the negative impact on corporate profits and the economy, others are rotating capital into areas that benefit from rising prices. Many metal stocks have gone parabolic, but their long-term charts suggest more gains could be in store.
So, if you’re looking for something to buy to diversify your commodity exposure outside of energy stocks, today’s picks are worth a look. All three topped the leaderboard Thursday with market-beating gains. Volume has exploded beside the price, suggesting institutions and other whales are entering the water.
That said, here are three picks to play the ongoing strength:
After a brief look at each chart, I’ll share a low-cost options strategy with explosive upside.
Red-Hot Metal Stocks to Buy: Cleveland Cliffs (CLF)
Ohio-based Cleveland Cliffs is a producer of iron ore and steel products. Its cheap share price and high volatility have made it a favorite pick for momentum traders looking for action. It boasts a beta of 2.07 and currently has an average true range of $1.25. That translates into 5% daily moves. Its price history reveals several boom and bust cycles.
In other words, instead of a steady climb over time, we’ve seen epic periods of gains followed by massive drawdowns. While a problematic stock to buy and hold, its personality is perfect for tactical traders. Though its share price has grown 10-fold from $2.63 at the pandemic lows and may seem richly priced, it’s previously been higher than $100. So there’s fare more upside if this inflationary cycle follows past ones.
Upside call options are in high demand, and it’s providing great pricing for call vertical spreads.
The Trade: Buy the April $26/$30 bull call spread for $1.15.
The max loss is $1.15, and the max gain is $3.85 if prices grow past $30.
United States Steel (X)
United States Steel rallied nearly 7% on Thursday, notching its sixth straight winning session. The gains carried X stock through long-term resistance, creating a tempting breakout trade. While the metal stock is overbought on the daily time frame, it’s just now breaking out of a year-long consolidation period and has plenty of room to run on the weekly time frame.
Given the strength behind steel stocks and hyper-attention investors are paying to commodity-related names, I suspect any weakness will be a buying opportunity. Like CLF, there’s high demand for OTM call options, making call verticals favorably priced.
The Trade: Buy the April $32/$37 for $1.30.
You’re risking $1.30 to make $3.70 if CLF sits above $37 at expiration.
Red-Hot Metal Stocks to Buy: Freeport-McMoran (FCX)
Copper prices are on the verge of breaking through significant resistance to a new record high. The surge has traders piling into Freeport-McMoran, which historically moves in lockstep with the commodity.
We’ve seen six days of accumulation lifting FCX stock to a 10-year high. The 20-day, 50-day, and 200-day moving averages are all trending higher to confirm buyers dominate across all time frames.
Like its predecessors, FCX is pushing out of a long-term base and has plenty of room to run. With such a bullish bias, options strategies that offer large potential rewards seem like the best fit here.
The Trade: Buy the April $50/$55 bull call spread for $1.60.
You’re risking $1.60 to make $3.40 if prices rise past $55 by expiration.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
