Earnings Preview: United States Steel Corporation (X)

United States Steel Corporation (NYSE:X) will report earnings after the close on Tuesday

Oct 31, 2016 at 10:49 AM
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United States Steel Corporation (NYSE:X) is preparing to report third-quarter earnings after the market closes on Tuesday, and shareholders are hoping the company will follow in the upbeat footsteps of sector peers AK Steel Holding Corporation (NYSE:AKS) and Steel Dynamics, Inc. (NASDAQ:STLD). Positive expectations are hardly out of line for the steel stock, which is up a whopping 142% year-to-date at $19.31. Plus, X has moved to the upside in the session following its earnings report in five of the past eight quarters, with an average single-day swing of 10.1% in either direction.

In X's options pits, calls are more than doubling puts this morning, extending a recent trend. Specifically, call open interest is seated in the high 84th percentile of its annual range, while put open interest is in just the 4th annual percentile. Nonetheless, there may be some skeptics -- including one trader who seemingly bought to open a block of 500 weekly 11/4 16.50-strike puts. If so, the speculator is either betting on X to drop below $16.50 before the end of the week, when the put expires, or is a shareholder hedging against a potential earnings pullback.

Taking a step back, call buying has dominated the action in X's options pits in recent weeks, with the stock's 10-day call/put volume ratio of 1.63 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) ranking just 5 percentage points shy of a 12-month peak. Meanwhile, options buyers on either side of the aisle could be getting a bargain on X's near-term calls and puts. The stock's Schaeffer's Volatility Index (SVI) of 67% sits lower than 79% of the past year's readings -- indicating relatively low volatility expectations are being priced in. At the same time, the equity's Schaeffer's Volatility Scorecard (SVS) of 96 suggests the options market has significantly underpriced X's ability to make big moves over the last year.

It's worth noting that some recent call buyers could in fact be short sellers looking to hedge against an upside surprise. After all, nearly 26% of X's available float is currently wrapped up in short interest. This skepticism is evident elsewhere on the Street, as well, with brokerage firms maintaining rather bearish outlooks.

From a technical standpoint, this pessimism appears undeserved. Aside from more than doubling on the charts in 2016, X's pullback from its late-July annual highs has found a potential triple-barreled level of support from the $16 level, the rising 200-day moving average, and a trendline connecting the stock's series of higher lows since March. That's not to say it's all been smooth sailing. United States Steel Corporation's (NYSE:X) recent rally attempts have been repeatedly shut down at the round $20 mark -- a level that coincides with peak call open interest in the front-month November series.

us steel x daily october 31

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