Calls in play as steel stock strengthens

07/08/21
  • SCHN call volume more than 170 times put volume on Wednesday
  • Stock has been rangebound since retreating from 10-year high last month
  • Shares rallied more than 3% on big day for steel stocks

So-called “commodity stocks”—companies that produce or deal in specific raw materials—will often see their share prices closely track the ups and down of the commodities they depend on. Oil stocks tend to track oil prices, lumber stocks correlate to lumber prices, and so on.

There are two important “buts” about this generalization. First, this doesn’t mean the relationship is constant and perfect—just look at the energy sector’s recent slump despite soaring oil prices. Second, every company is a unique entity, which means stocks can diverge even if they’re in the same basic business.

Consider Schnitzer Steel (SCHN), which has held its own this year in the steel group, gaining more than bellwether U.S. Steel (X) but trailing leader Olympic Steel (ZEUS):

Chart 1: Schnitzer Steel (SCHN), Olympic Steel (ZEUS), U.S. Steel (X), 12/31/20–7/7/21. Steel stocks price chart. YTD steel returns.

Source: Power E*TRADE


As these three examples suggest, most steel stocks gave back some of their previously red-hot rallies last month as their namesake metal retreated (and perhaps as hopes for a blockbuster infrastructure package collided with Capitol Hill political realities1). Many of them, including SCHN, stabilized and consolidated over the past two or three weeks.

Yesterday, though, was a conspicuously strong day for the group, with some names rallying more than 2% on a quiet morning for the broad market. But SCHN also stood out from the steel crowd because of its even larger gain (it was up more than 3% around midday) and its heavy options activity. In early trading nearly 174 SCHN calls were trading for every put:

Chart 2: LiveAction scan: Highest call-put ratios, 7/7/21. Unusual options activity. Ninth-highest call-put ratio.

Source: Power E*TRADE


Most of the activity was in the July $50 and $55 options (expiring next week)—the two nearest strikes above SCHN’s stock price yesterday morning.

Meanwhile, the stock was pressing the top of the trading range it had been in since testing its March highs after a 21% retreat from its June peak of $59.34, which was the highest the stock had been since May 2011:

Chart 3: Schnitzer Steel (SCHN), 3/4/21–7/7/21. Schnitzer Steel (SCHN) price chart. Rangebound after retreat.

Source: Power E*TRADE


While the steel group’s hopes for a renewed rally may hinge mostly upon the broad market's trend and the trajectory of steel prices (in May, Morgan Stanley analysts laid out their arguments for longer-term steel strength2), the path of any individual stock is subject to many other factors—including near-term trader positioning, which can sometimes make itself felt in unusual options activity.

Today’s numbers include (all times ET): EIA Petroleum Status Report (11 a.m.), Consumer Credit (3 p.m.).

Today’s earnings include: Levi Strauss (LEVI), PriceSmart (PSMT).

 

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1 BBC.com. Biden backs $1.2tn infrastructure bill but places big condition. 6/25/21.
2 Barron’s. Buy U.S. Steel Stock Because This Market Cycle Will Be ‘Stronger for Longer.’ 5/11/21.

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