Tariff News Puts Spotlight on AK Steel Option Bulls

While calls have been popular, part of the activity could have been from short sellers

May 31, 2018 at 9:16 AM
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Domestic steel companies are in focus this morning due to reports that the Trump administration is ready to put tariffs on steel and aluminum imports from Mexico, Canada, and the European Union (EU). One name to pay close attention to amid this news is Ohio-based AK Steel Holding Corporation (NYSE:AKS), as any tariff-induced gains could mean major profits for a number of recent options traders.

Jumping right in, options data from the past 10 days shows that the June and July 5 calls saw the largest increases in open interest, with nearly 5,000 added at the former and 4,600 at the latter. The vast majority of these positions were bought to open, meaning speculators expect the stock to topple the $5 mark by the respective expiration dates of June 15 and July 20.

Meanwhile, the June 6 call is also home to heavy open interest, but most of these positions were opened several weeks back. All the same, data hints at a preponderance of buy-to-open activity here, too, so some options traders are hoping for an even bigger breakout from AKS shares.

However, the stock is heavily shorted, with more than one-fourth of the total float controlled by short sellers. If you go by average daily volumes, it would take almost six sessions for these bears to cover their positions. This could suggest that some of the recent call activity on AK Steel has been at the hands of short sellers hedging.

The skepticism doesn't stop there, either. Only three of the 12 brokerage firms that cover the security say it's worth buying, and there are two "sell" or "strong sell" ratings. Just yesterday, Goldman Sachs downgraded its rating to "sell" from "neutral" and dropped its price target to $4 from $6, citing increased competition in the automotive space.

But when you look at the charts, the bearish outlook seems fair. The stock has shed more than 19% in 2018 to trade at $4.58, and the 50- and 80-day moving averages have kept a lid on the shares in recent weeks. And while the tariff reports have AKS up 4.6% before the open, this would still leave it below the $5 level.

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