Traders hope for hot summer in steel sector
06/20/17

Some traders apparently think the White House will turn steel stocks from red to green.

President Trump has been a supporter of the industry, endorsing protective tariffs against cheaper imports. Money streamed into the sector following his election, and by February the ARCA Steel Index was at its highest in more than two years. But enthusiasm dwindled in the following months, and the group was soon mired in negative territory.

On Monday, U.S. Commerce Secretary Wilbur Ross gave the bulls something to chew on by saying that some kind of action was still likely. "We have not yet submitted our report from Commerce to the President," the billionaire-investor-turned-government official told Bloomberg Television from an investment conference. Trump, he added, "plans to take bold actions."1

Not long after, options activity spiked in two domestic steel names. Traders started with Charlotte-based Nucor (NYSE: NUE) – currently the top U.S. producer – gobbling up blocks of the July 62 calls for $0.40 to $0.65. Volume soon shot past 20,000 contracts. That's nothing to sneeze at in a company that was averaging less than 5,000 in turnover during the previous month.

Before they were even done with NUE, buyers turned to Steel Dynamics (NYSE: STLD), amassing more than 20,000 of the July 38 calls for $0.40 to $0.60.

Steel Dynamics (STLD), 1-year chart

Source: OptionsHouse by E*TRADE

Here's what they'll be looking for next:

  • Calls fix the price where a security can be purchased. They can leverage a rally in the underlying stock but also expire worthless if no move occurs. 
  • NUE, for instance, rose 1.60 percent to $55.80. Assuming an average cost of $0.50 on the July 62 calls, the shares must climb another 12 percent to roughly $62.50 for the options traders to break even. 
  • They'll double at $65 (just 1 percentage point higher) and triple at $65.50 (another percentage point.) The options will go to zero if NUE remains under $62.

STLD had an initial spike but faded to end the session down 0.96 percent to $32.86. Both companies were also upgraded by Longbow Research, which thinks government protection will drive gains of 20-40 percent across the sector.2 U.S. Steel (NYSE: X) jumped on a similar note from Credit Suisse in late May.

Aside from the possibility of an announcement from the White House, NUE and STLD are slated to announce quarterly results before Monday's calls come due. Either way, traders are looking for fireworks in the space by July.

 

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1. Bloomberg: Trump Plans to Take ‘Bold Action’ on Steel Imports, Wilbur Ross Says. 6/19/17.

2. Barron's: U.S. Steel: As Steel Prices Go, So Go Steel Stocks?. 6/19/17.