Name That Trade $X: US STEAL?

by Dan January 22, 2015 1:45 pm • Commentary

Calls are active today in U.S. Steel (X), despite (or because?) of the stock being within a couple percent of the 52 week lows made on Tuesday.  Earlier, when the stock was $21.85 there was a closing seller of 6900 March 30 calls at .12, followed by an opening buy of 15,000 February 24 calls for .58 to open.  This could have been a roll down by the same investor, but it really doesn’t matter. The stock’s ytd decline of 17%, and the 50% drop from the 52 week highs in Sept tell the whole story. There are those who will give up on existing long biased trades, and those new to the story who will see a massively oversold stock.

U.S. Steel (X) has obviously been at ground zero for the industrial commodity collapse and very much linked to the health of the Chinese economy in the face of declining demand, per Reuters:

China’s apparent crude steel consumption fell for the first time in three decades in 2014

Official data shows China’s power output growth fell to a 16-year low last year, while coal output likely dropped for the first time in more than a decade.

As far as demand, I have no idea, and I would be very surprised if it turned on a dime.  I am on the record suggesting that the collapse in industrial commodities was in fact the first Fed induced bubble to collapse, and just as it overshot on the upside, it could very well do so on the downside.  Trying to pick a bottom of a risk asset that has crashed is tricky business, which is why defined risk contrarian trades make most sense.  

In the case of X, options prices seem a tad expensive despite the massive move from the recent highs, but the stock has settled a great deal of late, so expressing directional views with long premium strategies could be a hard way to catch a potential turn.  While 30 day at the money implied vol (blue line below) is well below the October highs, it is important to note that it remains 55%, nearly up 100% from the 52 week lows and going the other way from realized vol (white below – how much the stock is actually moving):

[caption id="attachment_50146" align="aligncenter" width="600"]X 1yr chart of 30 day at the money IV (blue) vs 30 day at the money realized vol (white) from Bloomberg X 1yr chart of 30 day at the money IV (blue) vs 30 day at the money realized vol (white) from Bloomberg[/caption]

Obviously the large call purchase could be something other than a bullish bet, possibly protecting a short? We just never know, but the oversold nature of X and the bullish flow does get my antennas up.

The one year chart below shows the death cross that occurred a few days ago (the 50 day moving avg – purple, crossing below the 200 day moving avg  – yellow), but I would argue that this formation which I like as one input may not be as useful for a stock that has already crashed like X has:

[caption id="attachment_50147" align="aligncenter" width="600"]X 1yr chart from Bloomberg X 1yr chart from Bloomberg[/caption]

If I were to play for an oversold bounce I would look to make it the break-even fairly tight, and expect no shortage of overhead resistance in the highs $20s, with $30 likely being an insurmountable ceiling aside from some sort of M&A or corporate action.  The rub is pretty simple, the lower the stock goes the higher the debt to enterprise value ratio becomes currently .64 ($3.25 bil market cap, $1.25 bil cash & $3.52 in debt).  Which is a big reason for the high short interest, at about 26%.

The Feb 24 calls that were bought in size earlier (20,000 traded on day so far) looked like a fairly good do, but I am not going to chase them as vol is up a couple points.  Will look for vol to settle prior to the Jan 27th earnings and possibly look at calendars or buying call spreads a bit longer dated.