A daily feature available on SchaeffersResearch.com is "Options Update." Every day, we'll give a brief market overview and focus on one stock that is the center of some heavy option trading. The focus of today's feature is AK Steel (AKS) and S&P Midcap 400 Depositary Receipts (MDY).

As we enter midday trading, the Dow Jones Industrial Average (DJIA – 11,993.9) has lost its hold on the 12,000 level although it is still modestly higher, while other major indices are mixed. As investors sift through a landslide of earnings reports issued yesterday evening and earlier today, they are also examining the latest round of economic data. Consumer prices dropped 0.5 percent overall in September, driven by a sharp pullback in energy prices, which slid 7.2 percent lower. The core number, which leaves out food and energy costs, edged up 0.2 percent, matching the consensus view. The year-over-year increase in the core number, however, rose 2.9 percent to a 10-year high, sparking some additional inflationary concerns.

Crude futures are in negative territory amid mixed supply data. While gasoline supplies dropped for the first time in nine weeks, crude inventories climbed for the third week running, rising 5.1 million barrels to 335.6 million. At last check, November crude oil futures were down 23 cents to $58.70 per barrel, while unleaded gasoline futures were higher by a penny to $1.475 per gallon.

Most-Active Options Update

At 1:17 p.m. Eastern Time, the Dow Jones Industrial Average (DJIA – 11,980.3) is 30 points higher after hitting an all-time peak of 12,049.5 this morning. The S&P 500 Index (SPX – 1,365.00) reached a new five-year peak earlier today and is now virtually unchanged, up less than half a point. The Nasdaq Composite (COMP – 2,338), meanwhile, is seven points (0.30 percent) lower in early-afternoon trading. At 1:18 p.m. Eastern Time, 3,088,745 calls have changed hands compared to 2,242,486 puts, equaling a single-day put/call volume ratio of 0.72. The CBOE's equity put/call volume ratio stands at 0.75, while the ISE's ratio weighs in at 0.83.

Option Activity Follow-Up - S&P Midcap 400 Depositary Receipts (MDY)

Yesterday's column mentioned some sizeable transactions on the S&P Midcap 400 Depositary Receipts' (MDY: sentiment, chart, options) December 36 (DIX XF) and December 39 put (DIX XI) strikes. At the session's conclusion, volume remained at midday levels – with 30,000 positions having traded on the 36 put while 20,000 changed hands on the 39 put. The 139 put saw its open-interest reading surge from 734 to 20,734, as all of the day's volume translated as new trades. The 136 put remains the site of heaviest open interest, as its open-interest reading edged up to 35,370 from 31,867 contracts in the previous session. All of this trading shoved the exchange-traded fund's Schaeffer's put/call open interest ratio (SOIR) to 2.36 from 1.83 on Tuesday.

The implied volatility held pat at 20 percent on the 36 put, while inching fractionally higher on the 139 put to 19.1 percent. Meanwhile, MDY continues to hold above short-term support at the 142 mark, keeping both of these puts out of the money by a decent margin (but bear in mind that they will not expire for two months).

AK Steel

True to its name, AK Steel (AKS: sentiment, chart, options) manufactures carbon, stainless, and electrical steel products. According to Hoover's, the company relies on the automobile industry for nearly half of its sales. In today's action, AKS is relying on options players to bring it a little bit of attention. The speculative crowd has descended upon the November 15 call (AKS KC), a slightly in-the-money position that has seen more than 14,500 contracts cross the tape today. With slightly more than 4,000 contracts in residence before today's action, it is likely that the bulk of today's volume will translate into new open interest tomorrow. The 15 call strike is already home to heaviest open interest in the October, November, and December series; among these three months, there are nearly 32,000 open 15 calls. The stock's move above this threshold of potential structural resistance is a testament to its strength.

The speculative crowd has turned its interest to AKS as the company's union gathers north of Cincinnati to vote on the company's second final contract offer (side note: is "second final" an oxymoron? Discuss.) The union representing 1,800 hourly workers is currently not recommending ratification, but the union's president notes that it is time to end the lockout, which began when an old contract expired at the end of February. The group previously rejected an earlier proposal by a narrow margin of 54 percent to 46 percent.

Today's options activity has trickled across the tape in all shapes and sizes, ranging from block sizes of one contract to 7,400 contracts. The larger blocks went off between 10:30 and 11:45 and traded at or near the ask price, suggesting they were initiated on the buy side. Look for today's action to have an impact on the stock's Schaeffer's put/call open interest ratio (SOIR), which weighs in at 0.27 and is already within three percentage points of an annual low. Should today's contracts build the open-interest reading at the November 15 strike, this reading could peg a new nadir (which is cause for modest concern from our contrarian perspective).

The stock's price action justifies this bullish speculation, as AKS has zoomed nearly 40 percent higher during the past four weeks. Rebounding from technical support in the 11.50 region, the stock has ridden the wave of broader-market strength to its highest point since mid-April.

The shares have regained control of their 10-week and 20-week moving averages, forcing these trendlines into a bullish crossover for the first time since early January.

With call buyers licking their chops and AKS up such a hefty margin in such a short period of time, it causes the skeptic in me to wonder if the stock has risen too far, too fast. If so, it could be on the precipice of a pullback. One thing that AKS does have going for it (other than a union president that seems willing to compromise) is heavy short interest. More than 13 percent of the company's float is sold short and it would take about six-and-a-half days (at the stock's average daily volume) to dump all of these bearish bets. With the stock exhibiting a solid rally, these bears could begin to relinquish their positions, creating some additional buying demand as they repurchase their sold positions to close them out.

Additionally, AKS has not yet gained the bullish attention of Wall Street. Currently, only four analysts follow the shares, just one of which names AKS a "buy." What's more, two firms list the steel stock as a "strong sell." Added coverage or an upgrade or two could continue to feed the equity's rally.

Summing up, AKS earns a Schaeffer's Equity Scorecard rating of 6.0, which seems about right from a risk/reward perspective. Remember that "the trend is your friend," but too dramatic of a trend has the risk of a dramatic conclusion. Options players are crowding the bullish bandwagon, but short sellers and skeptical analysts stand at the ready to produce some positive attention. It may all come down to the broader-market environment and the union's decision, which largely seems to be priced into the stock already (another "no" vote could send the shares reeling). I'm keeping this one on my radar but exerting a degree of caution. Thanks for reading and good luck with your own trading decisions!

** The tables below reference notably active call and put contracts across all six exchanges.**