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Pre-Earnings Bulls Target United States Steel Corporation (X)

June-dated call volume rises on X ahead of earnings

by 4/25/2013 2:25 PM
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Options players have changed their tune on United States Steel Corporation (NYSE:X) today, compared to Monday's bearishly skewed session. Roughly 32,000 calls have changed hands so far -- about double the norm, and 3.5 times the number of puts traded. It looks as though some of these bullish bettors are expecting the steel producer -- which is on tap to report quarterly earnings next week -- to trek higher within the next two months.

One of the more active strikes today is the June 20 call, where nearly 2,500 contracts have crossed the tape at a volume-weighted average price (VWAP) of $0.38. The majority of these out-of-the-money calls were exchanged at the ask price, signaling buyer-driven volume. Since these options holds open interest of fewer than 1,400 contracts, it's likely that new positions have been initiated here.

In order for speculators to secure a profit on these bought-to-open calls, X must rise above the $20.38 mark (strike price plus the VWAP) by the close on June 21, when back-month options expire. This denotes expected upside of about 14.8% from the stock's current perch at $17.74, and territory last explored in mid-March. Meanwhile, the delta for these options sits at 0.25, giving them a 1-in-4 chance of finishing in the money.

As alluded to earlier, today's uptick in call volume is a deviation from United States Steel Corporation's recent trend. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 10-day put/call volume ratio of 1.68 for the security, confirming puts bought to open have easily outstripped calls during the past two weeks. This ratio is just 1 percentage point shy of a 12-month peak, meaning speculators have rarely picked up bearish bets over bullish at a faster pace during the past year.

This prevailing pessimistic attitude isn't unfounded, considering X's year-to-date loss of more than 25%, as well as its year-over-year decline about 37%. What's more, the shares have trailed the broader S&P 500 Index (SPX) by nearly 30 percentage points during the past three months. On the charts, the equity continues to trade below its downward-sloping 10-week moving average, which has acted as a ceiling since early February.

Fundamentally speaking, United States Steel Corporation will reveal first-quarter earnings before the open on April 30, and has topped consensus bottom-line estimates in each of the past four quarters. However, in three of those instances, the stock was trading more than 2% lower the day after posting results, and in one case, it was off 7.5% a week later. Also of note, the Pittsburgh-based company gave workers at its Lake Erie plant a lockout notice effective Sunday at 9:00 a.m. ET, after X's contract proposal was rejected on Tuesday -- a development that could have an impact on production.


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