2 Booming Steel Stocks With Cheap Call Options

Steel stocks have been rallying over the past month

Dec 20, 2017 at 3:22 PM
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Steel stocks have been rallying, boosted earlier this month after the U.S. announced plans to begin imposing tariffs on Chinese steel being exported out of Vietnam. While the VanEck Vectors Steel ETF (SLX) is up 14% from its Nov. 17 bottom, all nine names we track under our "steel iron" umbrella are trading north of their 80-day moving average -- the only other sector besides "gaming" to sport this impressive feat. Below, we drill down on steel stocks AK Steel Holding Corporation (NYSE:AKS) and United States Steel Corporation (NYSE:X) to see how they're performing, and how sentiment is lined up.

AK Steel Stock Options Price in Low Volatility Expectations

AK Steel shares are trading up 2.4% at $5.66, after Longbow Research upgraded the stock to "buy," citing high expectations for decreased supply and increased demand in 2018. Since hitting an annual low of $4.00 on Nov. 15, AKS stock is up 42%, and on track to close north of its 160-day moving average for the first time since Oct. 24. This trendline has helped to contain the shares since late March.

Short sellers aren't buying the bounce, with short interest up 18.6% in the two most recent reporting periods to 58.61 million shares. Though this is still down from the mid-September peak of 73.25 million shares, it still represents a lofty 18.72% of AKS' available float, or 4.4 times the average daily pace of trading.

In the options pits, however, call buyers have been more active than usual of late. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), options traders have bought to open 27,889 calls and 2,036 puts over the past 10 days. The resultant call/put volume ratio of 13.70 ranks in the 79th annual percentile. Considering AKS remains down 44% year-to-date, it's possible short sellers are using call options to hedge against any additional upside risk.

Whatever the reason, now is an ideal time to buy short-term calls on the stock. While AK Steel's 30-day at-the-money (ATM) implied volatility (IV) of 48.2% ranks in the 3rd annual percentile -- indicating low volatility expectations are being priced into near-term contracts -- its 30-day IV skew of 7.3% ranks higher than 85% of all comparable readings taken in the past year. In other words, calls are cheap relative to puts.

U.S. Steel Short Sellers Have Been in Cover Mode

Longbow also upgraded U.S. Steel to "buy," sending the stock up 2.7% to trade at $34.74. X shares have been notching a series of higher lows since their May 18 annual low of $18.55 -- up 87%. And while the security pulled back in mid-November along with its sector peers, it found a foothold atop its 80-day moving average, a trendline that's served as steady support since late September.

Unlike AKS, short sellers have been in covering mode on X -- which may help explain the stock's recent rise. Since its mid-September peak, short interest is down almost 43% to 18.02 million shares, the fewest since early 2009. Though this still accounts for 10.6% of the stock's float, it would take just two days for shorts to cover, based on U.S. Steel's average pace of trading.

Options traders at the ISE, CBOE, and PHLX, meanwhile, have been buying to open calls relative to puts at an unusual pace in recent months. The stock's 50-day call/put volume ratio of 2.25 ranks higher than 71% of all similar readings taken in the past month.

Those targeting short-term calls are currently in luck. While U.S. Steel stock's 30-day ATM IV of 38.3% ranks lower than 99% of all other readings taken over the last 12 months, its 30-day IV skew of 8.1% is perched in the 95th annual percentile.

 

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