I’ve said it before and I’ll say it again, the market is always right, until it’s not. And right now, a fairly unpopular Cliffs Natural Resources Inc (NYSE:CLF) fits the bill for contrarian investors looking to buy when there’s clearly blood on the streets.
As part of a group which stood to benefit from Trump’s pro-America, pro-business and infrastructure agenda, a blue-skies forecast for CLF was all but guaranteed as a polarized ‘in-Trump-we-trust’ investor base bought the story hook, line and sinker.
Today’s narrative and actually for the past couple months now, has changed dramatically. That’s not exactly news at this point. Over this period worries such as weakened Chinese demand or South Korea dumping steel have acted as drags on CLF.
And now of course, Trump’s “big, huge, really huge” plans for the U.S. are getting derailed as investors worry about the latest allegations against the commander in chief involving Russia and in turn, increased political and legal scrutiny that’s having some people bandy about a potential impeachment.
The good news — no, it’s not “fake news” — is that aside from a fairly decent earnings report beyond the headline miss, CLF is showing signs the worst may be priced in. Further and in our view, today’s authoritative bearish storyline is likely no better in the scheme of things than the prior bullish narrative which, let’s be honest, didn’t quite work out as planned.
Cliffs Natural Resources Chart
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Since discussing CLF just over one month ago as a contrarian play, price action has admittedly not gone as planned. A deep corrective move and price break below the key (but also “too popular for its own good”) 200-day simple moving average, had this strategist anticipating shares could hold an existing uptrend line slightly above the Trump rally low.
That scenario failed to pan out in CLF and shares are off 15% since our article. Nevertheless, it’s our view that for contrarian-minded bulls, there’s still hope for CLF stock without having to bring out any talismans or other lucky trinkets to do one’s bidding.
Technically, the move lower in CLF has set shares up between the 50% and 62% retracement levels and inside a lateral zone defined by pre- and post-Trump-election results. With stochastics firming up and CLF bouncing around laterally in this support area the past couple weeks — a bullish options position is still worthy of our backing off the price chart.
CLF Stock Bullish Collar Spread
The good news about using hedged strategies like the collar discussed in our last article on CLF is that losses can be fully contained. In this instance, the damage is nearly 45% less than a standalone stock purchase.
What’s more, in certain circumstances, a collar can allow traders the financial and mental confidence to add and/or bullishly adjust to positions when everyone else is saying, “sell, sell, sell!” at typically the exact wrong time.
Currently and after reviewing CLF’s options I still like the collar for intermediate-minded investors that believe in the long game for Cliffs Natural Resources. After reviewing the options board, the Jan $9 call/$5.50 put collar is attractive.
With shares of CLF at $6.22 the collar is priced for $6.60. What does the additional premium of 38 cents offer investors? Protection is the big benefit. With the put purchased on the $5.50 strike, this means for the next 8 months downside risk is set at less than 17%. There’s also the 62% retracement level for those interested in potential chart support.
Ultimately, this sort of protective value could come in handy. While the strategy is bullishly biased, as mentioned, it does put the investor in a better all-around situation to steal from Warren Buffet’s playbook of buying when others are fearful.
The real downside is if shares of CLF move aggressively higher through the sold $9 call — and sooner, rather than later. In this kind of overly bullish situation profits are initially capped into expiration at $2.40.
The better news is adjustments to trade with a new and more bullish trend in CLF stock would certainly be possible. And bottom line, I’d take a return of 36% or 54% annualized any day of the week and without getting too upset, given the insurance value of the collar.
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.