Call Players Take Aim at 2 Surging Steel Stocks

While the broader market has erased its early election-related losses, several sectors are still showing extreme reactions to Donald Trump's victory. Among these are basic materials -- particularly steel stocks -- which have tacked on significant gains. Among the specific names flying higher this morning are AK Steel Holding Corporation (NYSE:AKS) and Steel Dynamics, Inc. (NASDAQ:STLD). Below we'll take a look at how traders in and outside of the options pits are reacting so far.

AKS has been a serious outperformer already this year, tripling on the charts in 2016 alone. In fact, the shares have outperformed the broader S&P 500 Index (SPX) by more than 48 percentage points over the last two months. Last seen up 12.4% at $6.82, the stock popped to an intraday high of $7.06 this morning -- just a hair shy of a fresh two-year high.

Aside from the post-election excitement, AKS is getting a boost from a bullish brokerage note this morning. Specifically, Jefferies raised its price target of the stock to $7.50, while also weighing in on another sector peer. More upbeat analyst attention could be on the way, too. At the moment, eight out of 11 firms following the equity rate it a "hold" or worse.

There's room for bears to exit elsewhere, as well. Short interest on AKS climbed by 21.2% over the past two reporting periods, and now represents more than 29% of the stock's total float. Moreover, the nearly 69 million shares sold short -- a 12-year high, at least -- would take over seven sessions to cover, at the equity's average daily pace. That's plenty of buying power to keep AKS soaring higher.

Turning to the options pits, call buying has been popular in recent weeks. In fact, more than 11 AKS calls were bought to open for each put over the last 10 days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- higher than 70% of all readings in the past year. Still, some of these call buyers could also be short sellers looking to hedge their bearish bets with options.

Today, both calls and puts are accelerated in AK Steel Holding Corporation's (NYSE:AKS) options pits, with calls clearly leading, trading at two times the expected intraday rate. Among the most popular contracts so far is the December 6 call, where data from the ISE confirms some traders are selling to close their now in-the-money positions to collect profits.

Switching gears to look at STLD, the stock has added 8.9% to $31.05 today with stock volume on track for an annual high. The shares have widened their year-to-date lead to nearly 74%, and tapped a fresh eight-year high of $32.08 earlier in the session.

Though the security hasn't seen any brokerage attention this morning, it already boasts "buy" or better ratings from nine out of 11 tracking analysts. That doesn't mean more bullish notes are out of the question, though -- the average 12-month price target of $30.50 sits at a discount to current trading levels, leaving the door open for future price-target hikes.

Elsewhere, it looks like bears have been throwing in the towel. Specifically, short interest topped out at a nearly 10-year high in July, and has been declining ever since -- adding fuel to STLD's fire. In fact, these pessimistic positions dropped by about 21% in the most recent two-week reporting period alone.

Bullish bets are on the rise in the options arena. At the ISE, CBOE, and PHLX, STLD's 10-day call/put volume ratio has soared to 10.50 from 0.32 in the past two weeks -- though volume tends to run light on an absolute basis. Still, the current reading sits in the high 85th percentile of its 12-month range. Near-term traders are nearing a call-skewed extreme, too, with the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.23 sitting just 4 percentage points from an annual low.

Today STLD calls are flying off the shelves at eight times the typical volume for this point in the day, putting call volume in the 99th percentile of its annual intraday range. While speculators may be collecting profits at the January 28 call -- the most active strike this far -- possible buy-to-open activity has been spotted at the January 32 and 33 calls. If this is the case, call buyers are betting on Steel Dynamics, Inc. (NASDAQ:STLD) to extend its rally into multi-year high territory over the months to come.