Metals and Mining stocks, measured by the etf XME, is one of the best performing groups in the S&P in November, up nearly 25%. Its two largest components, AK Steel (AKS) & US Steel (X) leading the charge, both up about 70% since Halloween. In January of this year, this sector was being priced for massive bankruptcies as many of the heavily indebted components were trading at all time lows as investors questioned emerging market demand and punished high yield credit.
On Monday the XME traded at a new 52 week high, up 180% from its Jan lows. It is now approaching the late 2014 breakdown level but it is still nearly 65% from its 2011 all time highs when the China trade was on like donkey-kong. From purely a technical standpoint, since breaking above the downtrend from the 2011 highs back in July, the XME has formed a very nice base and could be poised for a move to the mid to high $30s even after the recent breakout:
At least one options trader positioned for continued upside over the next couple weeks, rolling out of 19,000 Dec 29 calls (sold to close at $2.46, or $4.67 million in premium) and buying to open 40,500 Dec 32 calls for 65 cents to open (or $2.63 million in premium). That’s a nice roll where the trader doubled the contract amount in case of a break out above resistance, while reducing total amount of money at risk by almost 50% in case the etf fails here at resistance.
When a stock is working and you have profits it can be a difficult decision when to take profits. A good rule of thumb is to take half the money off the table at a significant level like resistance. That way, if the stock breaks-out you’re still in the game, and if it doesn’t, you’re glad that you sold half. This type of discipline makes it easier to sleep at night.
In the case of options, that technique can be even more interesting, like with this trade where the contracts are increased while risk is reduced. That means if the stock breaks out this trader has actually doubled down.
The one issue you could take with this roll is that yes, it’s potentially doubling down while taking profits, but by reducing deltas and going out of the money, it’s greatly reduced its chances of success if the stock goes higher. BUT, here is the thing. Yes, the new calls are out of the money and completely extrinsic premium (meaning if the stock goes nowhere they decay to zero), but the 29 calls that were sold also had extrinsic premium left on them (about 40c). If the stock goes nowhere those calls that were sold would lose 40c. So you might as well spend that premium on something with more leverage, and that’s just what this trader did.