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U.S. Steel's Surge Attracts Bullish Short-Term Traders

Speculators pick up X's weekly call options

by 12/14/2012 12:46 PM
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On the heels of upbeat manufacturing data from China, United States Steel Corporation (NYSE:X - 23.88) has surged nearly 7% today. Consequently, bullish traders seem to have taken notice of the security, as roughly 55,000 calls have crossed the tape so far. This is more than seven times the stock's expected intraday volume, and about double the number of puts exchanged.

Garnering notable attention has been the weekly 23 strike, which has seen more than 4,200 calls change hands at a volume-weighted average price (VWAP) of $0.31. The bulk of these in-the-money contracts traded at the ask price, pointing to buyer-fueled activity. Since this option currently holds open interest of just 1,767 contracts, it's a safe bet that new positions are being added at this strike. By purchasing these calls to open, traders are expecting the shares to keep trekking north of $23.31 (strike price plus the VWAP) prior to today's close, which is when these weekly options expire.

This uptick in call volume is nothing new for X. The security's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio checks in at 2.26, indicating calls bought to open have more than doubled puts during the last couple of weeks. This ratio ranks higher than 80% of other such readings taken during within the past year, meaning traders have been snatching up calls over puts at a faster-than-usual pace.

Elsewhere, although short interest on the steel producer declined by close to 9% during the past two reporting periods, these bearish bets still account for a formidable 25% of the equity's available float. This suggests that some of the aforementioned buy-to-open call volume could be attributable to short sellers looking to hedge their positions. Either way, it would take nearly six days to buy back these shorted shares, at the stock's average pace of trading.

Also of note, the majority of analysts covering the security maintain a cautious attitude toward X. Only three have doled out "strong buy" recommendations, compared to seven "holds" and three "sell" or worse ratings. Furthermore, Thomson Reuters shows an average 12-month price target of $25.86 for the equity, reflecting a premium of less than 1% to its current perch.

This skepticism among the brokerage bunch isn't unwarranted. Taking the current session's climb into consideration, X has still shed nearly 10% year-to-date, and almost 6% on a year-over-year basis. However, today's traders are likely factoring in the stock's recent upward momentum, as X has gained close to 17% during the past month alone.


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