Making the Bullish Case for Cleveland-Cliffs Stock

It looks like a prime time to buy calls on this steel stock

Aug 18, 2017 at 7:15 AM
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Steel stocks spent the first two months of 2017 climbing, boosted by promises of a big infrastructure plan from the Trump administration. After topping out at a two-year high of $45.39 on Feb. 23, the VanEck Vectors Steel ETF (SLX) spent the next several months sliding amid D.C. drama, only to bounce from support in the $35 region -- home to their pre-election bear gap highs. Cleveland-Cliffs Inc (NYSE:CLF) is one SLX component that's pulled back from its February highs, too, but with the shares trading near a historically bullish trendline, it could be time to buy short-term calls on the stock.

Specifically, after topping out at a two-year peak of $12.37 on Feb. 13, CLF shares fell to the $5.60 region. The stock has since bounced back to the $7.15-$7.20 region -- closing last night at $7.16 -- and is within one standard deviation of its 40-day moving average, after trading north of here for most of the past two months. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, in the three other times this has occurred in the last three years, CLF stock has averaged a 21-day return of 18.5%, and has been positive each time.

clf stock daily chart august 17

There's been plenty of skepticism priced into the shares, too, which could help amplify another big swing north. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.55 ranks in the 92nd annual percentile, meaning puts have been bought to open relative to calls at a near-annual-high clip.

Plus, although short interest dropped nearly 24% in the two most recent reporting periods, it still accounts for a lofty 11% of CLF's available float. A capitulation from some of the weaker bearish hands could translate into tailwinds for the shares.

While it must be underlined that Cleveland-Cliffs has sold off rapidly from February to June, the stock's short-term options are attractively priced for anyone wanting to wager on a repeat of history. CLF's Schaeffer's Volatility Index (SVI) of 53% ranks lower than 98% of all comparable readings taken in the past year, meaning low volatility expectations are being priced into near-term contracts. Likewise, the security's Schaeffer's Volatility Scorecard (SVS) of 95 indicates the shares have exceeded options traders' volatility expectations over the past year -- a potential boon to premium buyers.

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