Spread outlook

Steel Dynamics’ (STLD) rally over the past couple of days probably didn’t attract much attention in the market, given the move represented a relatively modest bounce within the stock’s longer-term consolidation. But Wednesday’s trading did include a couple of conspicuous positions in STLD November call options:

For context, STLD’s high on Wednesday was a little below $130, so both options were well out of the money.

So, what did these positions potentially represent? First, there’s a chance they’re unrelated—different trades from different traders, who may have similar or opposing outlooks. That said, same-sized trades in calls with the same expiration date sometimes represent a single spread strategy. In this case, for example, a trader may have bought the lower-strike ($150) call while simultaneously selling the higher-strike ($170) call.

The goal of this long “vertical” (bull) call spread is to profit from a rise in the stock price. The long call should increase in value if the stock rallies, while the short, higher-strike call reduces the cost of that long exposure, but also caps the position’s potential profitability: While a plain long call position can continue to profit if the stock keeps rallying, a vertical call spread’s profit (at expiration) reaches its maximum when the stock reaches the upper strike price.

What would be somewhat unusual about this trade—if it is, in fact, a vertical call spread—is that both strikes are so far above the current stock price. A vertical call spread has the potential to profit at expiration if the stock price is between the two strike prices:

In this case, that means the position wouldn’t be profitable at expiration unless the stock was at least challenging its November record high (around $155), and it wouldn’t reach its maximum profit without rallying more than 31% above Wednesday’s high.

Of course, traders don’t need to hold a position until expiration to realize a profit. Regardless, if a trader did execute a vertical call spread in STLD using these strikes, it may represent a notably bullish outlook.

Finally, the possibility that a trader sold a November $150-$170 call spread—that is, shorted the $150 calls while buying the $170 calls—must be considered. This would be a bearish position that could generate a profit if the stock remained below the lower strike. What would be unusual about this trade is that the potential profit—limited to the net premium collected at execution—would have been roughly one-tenth the potential loss.

The complacency factor. US stock indexes rebounded to fresh record highs this week, fueled in part by hopes that the not-too-hot inflation implied by the latest Consumer Price Index (CPI) reading will allow the Fed to cut rates at its September meeting.

While Morgan Stanley Wealth Management recently acknowledged the logic that appears to be driving the recent bullishness—i.e., tariffs will be “navigable and non-inflationary,” growth in generative AI (combined with a capex boom spurred by the new tax law) will improve corporate profit margins and productivity, and the weak US dollar will help exporters—it also believes the market may be overlooking three key risks: a slowing jobs market, uneven corporate earnings, and mounting (if delayed) inflation pressures.

In light of these factors, Morgan Stanley’s Global Investment Committee thinks investors should consider adding exposure to real assets (e.g., gold, real estate investment trusts, energy infrastructure, and industrial and agricultural commodities), while also taking a selective approach to US large-cap quality stocks. Other suggestions include diversifying into intermediate-term investment-grade bonds (including muni bonds), international stocks (including emerging market), hedge funds, and private secondaries.¹

Today’s numbers include (all times ET): weekly jobless claims (8:30 a.m.), producer price index (8:30 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: Deere (DE), Advance Auto Parts (AAP), Applied Materials (AMAT), Sandisk (SNDK), Tapestry (TPR).

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¹ MorganStanley.com. Three Risks Behind U.S. Stocks’ Performance. 8/13/25.