Option Bulls Score Big on Soaring AK Steel Holding Corporation (AKS)

AK Steel Holding Corporation (AKS) is soaring on news out of China

Jul 12, 2016 at 10:49 AM
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AK Steel Holding Corporation (NYSE:AKS) has surged 4.5% to $5.16 today, following news that China has cut steel production in Tangshan. Also boosting the shares this morning are upbeat earnings results from fellow metals stock Alcoa Inc (NYSE:AA), and a price-target hike to $5 from $4 at Barclays. The stock's calls have been popular lately, and today's price action looks to be rewarding bullish options traders, who may have gotten a remarkable bargain.

AKS currently has a Schaeffer's Volatility Index (SVI) of 71% -- lower than 93% of all readings in the past year. Meanwhile, its 30-day at-the-money implied volatility clocks in at 71.9% -- in the low 2nd percentile of its annual range. Together, these readings suggest that premium on the stock's short-term options are pricing in historically low volatility expectations.

As alluded to, call buying has certainly been a popular strategy in the stock's options pits of late. Across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open more than 30 AKS calls for each put during the last 10 sessions. What's more, the resulting call/put volume ratio of 30.41 ranks higher than 85% of the last year's readings.

It's possible not all of these call buyers are bulls, however. Short interest on AKS represents over 19% of its total float, suggesting some short sellers may be picking up calls to hedge against upside risk. Yet, these bearish bets have been declining, falling by nearly 10% during the most recent two-week reporting period -- potentially fueling the stock's impressive run.

AKS could still see a boost from an unwinding of pessimism among analysts, as well. Just two of the 13 brokerage firms providing coverage recommend buying the stock, and the average 12-month price target is now underfoot, at $4.75.

On the technical front, AKS has had an impressive year so far, adding 130%, and hitting an annual high of $5.50 just over a month ago. The $4.40-$4.60 level has supplied some support for the shares in recent weeks, and today's pop above the $5 level represents a breakout above an area of round-number resistance that had been plaguing AKS since mid-April.

Finally, AK Steel Holding Corporation (NYSE:AKS) is preparing to report second-quarter earnings two weeks from this morning, and bulls may want to hold on until then. AKS has made a positive move in the session following its earnings report seven out of the last eight quarters.

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