United States Steel Options (X): Unusual Trading Activity
Options in steel giant United States Steel (X) experienced quite a large amount of unusual trading activity yesterday.
As X was trading at around $23.40 during the day, the overall options activity showed a staggering 50,000 contracts change hands. That’s nearly 5 times the normal activity for US Steel.
And just about 35,000 of these options indicated bearish activity.
During the day, one option trader came in and purchased 13,500 put contracts.
He purchased the X October $23 strike puts for a price of $1.59.
Now, even though that is a high price to pay for a speculative bearish bet, X is very volatile and it won’t take much of a market correction for this stock to retreat to that price.
It’s seems quite obvious that these option buyers believe that US Steel stock is going to sink in a commodity based pullback on global growth concerns.
If so, they’ll stand to make an unlimited amount of money on their $2,146,500 investment.
However, what’s going on with steel that would make a trader lay out this amount of money on a bearish play?
Before we get to that, just a little information on the company…
If you don’t already know, US Steel is an integrated steel producer with nearly 30 million tons of steelmaking capacity producing flat-rolled and tubular products in North America and Central Europe.
In addition to that, the company also produces coke and iron ore as well as engages in rail and barge transport services.
Now back to this enormous investment on the bearish side…
First, US Steel’s high degree of operating leverage creates more earnings volatility in response to market conditions. And as we’ve seen lately, earnings volatility has not bode well for companies that are reporting top line revenue misses.
Next, the US market for oil country tubular goods (OCTG) was plagued by strong imports and high inventories in late 2008. This caused steel prices to fall dramatically in 2009.
And as a result, domestic capacity expansion plans and a recent rebound in imports could put the recovery of the OCTG market at risk.
Finally, the company’s other operating segment that maintains coke production has been requiring significant capital investments. If this continues, this will also lead to top line revenue loss.
The upshot of all of this is option traders believe there’s a unique opportunity to take advantage of a nice pullback after a week of nothing but market upside.
We’ll see how it all plays out!
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Safe Trading,
Marcus Haber
Category: Unusual Options Trading Activity
