2 Underloved Steel Stocks for Options Buyers

AK Steel Holding Corporation (AKS) and United States Steel Corporation (X) could stand to benefit from overdue analyst attention

Feb 24, 2017 at 11:04 AM
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Metal stocks took a tumble on Thursday, as leaders of major U.S. manufacturers met with President Donald Trump to discuss trade deals and tax considerations. But the losses look like a blip on the radar when compared to the sector's long-term strength. In fact, the Metals sector sits near the top of our internal Sector Scorecard, with the SPDR S&P Metals & Mining ETF (XME) up 104% year-over-year, at $32.36. The high scorecard rank also suggests notable contrarian opportunities in the sector, so below we'll dig deeper on two major components -- AK Steel Holding Corporation (NYSE:AKS) and United States Steel Corporation (NYSE:X) -- which both seem to be serving up appealing opportunities for options buyers.

AK Steel Sees Little Love from Analysts

Up 217% over the past 12 months at $8.13, AKS tapped a five-year high in December, and has since pulled back to support above the $7.75-$8.00 region. But that hasn't been enough to win over the brokerage bunch, where 10 out of 12 analysts rate the shares a "hold" or "strong sell." A round of overdue upgrades could get the stock moving higher again. Meanwhile short interest, though down from October's highs, accounts for a notable 14% of AKS' available float -- meaning there's buying power on the sidelines that could give the shares a boost.

Options traders have been call-heavy on an absolute basis, but AKS' 10-week put/call volume ratio of 0.36 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) still ranks near the top third of all readings from the past year. In any case, it looks like a prime time to pick up premium, with AK Steel Holding Corporation's (NYSE:AKS) short-term options pricing in unusually low volatility expectations, per the stock's Schaeffer's Volatility Index (SVI) of 62% -- lower than 91% of the past year's readings. Plus, its Schaeffer's Volatility Scorecard (SVS) of 99 indicates AKS has made significantly bigger moves than the options market priced in over the last 12 months.

Options Traders Kept the Faith in US Steel

X has seen a similar setup to its peer, though the shares have kept their journey north going into 2017, adding over 13% year-to-date. At $37.30, the stock has more than quadrupled over the past 12 months. Even so, the shares could stand to benefit from a round of upbeat analyst notes, as more than half of the firms following X maintain a "hold" or worse opinion. Short interest also represents over 11% of the equity's total float, despite falling by roughly 50% over the past four months.

In the options pits, however, speculators have taken a glass-half-full approach, picking up X calls at near-extreme rates. In fact, the stock's 50-day ISE/CBOE/PHLX call/put volume ratio of 1.32 is seated just 2 percentage points from a 52-week peak. But it's still an enticing time to get in on the action. X has an SVI of 58% -- in the low 13th annual percentile -- as well as an SVS of 99. Together, these readings suggest near-term options buyers could be scoring an uncommonly good deal on United States Steel Corporation (NYSE:X).

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