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U.S. Steel Snares Quick-Minded Bulls

Weekly call options active two days before expiration

by 6/28/2012 8:29 AM
Stocks quoted in this article:

Weekly options traders have the luxury of ignoring a longer-term trend in favor of a short-term hunch. United States Steel Corporation (NYSE:X - 19.74) has attracted the attention of such ephemeral traders, who feel the materials stock can defy its declining ways and enjoy a quick trip higher through the end of the week.

Call volume on X ran about 20% above usual levels on Wednesday, with 23,000 positions changing hands. More than one-third of these contracts went off at the weekly 20 strike, easily exceeding open interest. The majority of these calls traded at the ask price, at an average of $0.19 per contract. It appears, therefore, that these were bullish bets bought to open in the hopes that X will move beyond the $20 strike by Friday's close. Breakeven on the position, at expiration, is $20.19, or roughly 2.3% above yesterday's settlement price.

X has not exactly been reliable when it comes to positive momentum. The stock has lost 25% in 2012, and is down 53% in the past 52 weeks. In Wednesday's trading, however, amid strong price action in the steel sector, X gained 5.4%. This followed a move from Deutsche Bank, maintained its "buy" rating on the shares but lowered its price target to $37 from $40 (according to dividend.com). This target is still more than 87% above the stock's closing price on Wednesday, and sits above the already lofty average 12-month price target of $33.07.

The next site of potential technical resistance for X shares is their 40-day moving average, perched well above the 20 strike at $21.66. The stock has been trading below this trendline since early May. Of more pressing concern to short-term X bulls is heavy call open interest in the July series, where more than 27,000 contracts collectively reside at the July 20, 21, and 22 strikes. These could put pressure on X stock as it tries to power through the round-number $20 level.

Given the stock's longer-term technical trend, it's no surprise that X has seen a lot of attention on the put side. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), over the past 20 weeks, puts have been bought to open with almost as much fervor as calls. The resultant put/call volume ratio of 0.99 is one percentage point away from an annual high, suggesting put buying has rarely been more popular over the past 12 months.

If X fails to hurdle the 20 strike by Friday's closing bell, the weekly call buyers only stand to lose the premium paid. Upside, however, is unlimited, for the life of the option contract.


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