Is an iconic steelmaker oversold?
05/31/17

Metals have been in the doghouse of late, but now some market pros are looking for a turn.

The S&P Metals & Mining Select Index is down 8 percent in the last three months, badly underperforming the broader market's 1.3 percent gain over the same period. U.S. Steel (NYSE: X), has really taken it on the chin, losing more than 40 percent of its value in that time.

Options traders seemed to be looking for a bounce in the first session after the long Memorial Day weekend. Going to work early and often, they targeted several different calls throughout the morning to take a chance on the stock moving higher:

  • They started with the 2-June 21 calls, gobbling up more than 7,000 contracts between $0.10 and $0.30.
  • Around the same time, orders appeared in the 2-June 20.50 calls between $0.21 and $0.50. More than 5,000 of those crossed the tape by lunchtime.
  • Shortly after 11:00 a.m. ET, the largest transaction appeared. This time, they sold 10,000 June 22 calls for $0.44 and bought an equal number of 30-June 21.50 calls for $0.91. 

Sure it may sound complicated, but the underlying intention is straightforwardly bullish. Calls, after all, fix the price at which a security can be purchased. They can appreciate more quickly than a stock if a rally occurs, but also become worthless if the shares fail to move.

The first two trades used short-term weekly expirations, looking for a potential surge in the share price by the day after tomorrow.

U.S. Steel (X) 1-year chart

Source: OptionsHouse by E*TRADE

The third transaction was apparently an adjustment of an existing position, with traders rolling from the standard monthly calls expiring on the third Friday (June 16) to the quarterly contracts. It cost a net $0.47 (they paid $0.91 and received $0.44), but lowered their breakeven by $0.50 and provided an additional two weeks for the stock to push higher.

X rose 5.22 percent to $20.77 yesterday. A heavy debt load and weak quarterly results have made it a favorite of the bears, who've added almost 1 million shares to short interest in the last month alone.1 That briefly sent the stock below $20 for the first time since November.

The bulls started pushing back on May 24, when Credit Suisse upgraded the entire sector to Overweight.2 Demand, they said, was strong. Prices for hot-rolled steel and sheet metal, they forecast, would rise. Valuations, they declared, were downright cheap. 

Washington may also be in play because President Trump has repeatedly criticized cheap imports of foreign steel. The Commerce Department barked up a similar tree last week by hearing testimony on whether the industry should be protected for the sake of national security.3 (For the pocket-protector crowd, it's Section 232 of the Trade Expansion Act of 1962.)

There are also a couple of people-related catalysts. First, X is in the process of transitioning to new CEO David Burritt. Will he shake things up for the better? Second, long-time global investor Mark Mobius this week said China's ongoing infrastructure investments will support industrial metals.4

Bottom line: Steelmakers like X have been under pressure for months, but now some traders are looking for a bullish turn.

 

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1. Yahoo Finance: Key Statistics page for United States Steel Corporation (X). Reuters: U.S. Steel's shares tumble on dismal results. 4/26/17.

2. Credit Suisse: Upgrade Steel Sector to Overweight. 5/24/17.

3. StreetInsider.com: Steel Stocks Surge Ahead of Public Comments on Section 232 Investigation (AKS) (X) (NUE) (STLD). 5/23/17.

4. Bloomberg: Mobius Says Iron Ore Consumption Likely to Be Sustained. 5/29/17.