X – U.S. Steel Dossier

by Dan October 31, 2017 2:15 pm • Trade Ideas

Shares of AK Steel (AKS) are trading down 19%, making a new 52 week low today after guiding down the current quarter, per Bloomberg:

Sees marginally lower flat-rolled prices in 4Q; expects auto shipments to be slightly lower in 4Q vs 3Q; also sees lower shipments in infra, manufacturing in 4Q
Also sees planned outage for 4Q to be $50m vs $8m in 3Q; expects to recover higher costs with higher pricing in 4Q
On equity raise, will wait for opportune time and continue to monitor the market

Today’s losses place the stock down 60% from its 52-week highs made just after the election in Nov that say its shares double in a matter of weeks on unfound optimism that Trump’s election would be good for steel:

AKS 1yr chart from Bloomberg

The 5-year chart is a mess, with the 52-week highs forming an epic double top, and today’s gap below an uptrend from 2016 lows:

AKS 5yr chart from Bloomberg

Which brings me to U.S. Steel (X) which reports today after the close. The stock is down 4% in sympathy, and the implied move in the options market is about $2.15 or about 8.4% (with the stock at $25.40, the Nov 3rd weekly 25.50 strike straddle, the call premium + the put premium is offered at about $2.15, if you bought that and thus the implied weekly movement you would need a rally above $27.65 or a decline below $23.35 by Friday’s close to make money, or about 8.4% in either direction). X has been a big mover post earnings over the last year, with a gain of 7% following Q2 results in late July, a decline of 27% in late April following Q2 results and declines of about 4,5% following the prior two prints.

A quick look at the one-year chart shows the stock’s technical vulnerability below $25 which happens to be the well-defined uptrend from the May lows, with obvious technical resistance near the late April gap level of $30:

X 1yr chart from Bloomberg

It almost seems to obvious to try to play for a similar collapse tomorrow in X as to the one we are seeing in AKS today, but if you knew the steel story well (which I don’t), and thought the company might offer a similarly disappointing Q4 guide, then it makes sense to press this on the short side, but with defined risk…

For instance with the stock at $25.40 you could play for a 10% drop to $23 this week:

Bearish Trade Idea: Buy X Nov 3rd weekly 25/23 put spread for 60 cents,
  • buying 1 Nov3rd weekly 25 put for 90 cents and
  • selling 1 Nov 3rd 23 put at 30 cents.


Break-evens on Nov 3rd:

Profits of up to 1.40 between 24.40 and 23 with a max gain of 1.40 at 23 or lower

Losses of up to 60 cents between 24.40 and 25 with max loss above 25.

Rationale: the stock is down 23% ytd, and down 4% on the day, playing for further losses this week is clearly a press. But with an earnings event, insult could be added to the share’s misery. This trade defines risk to 2.3% of the underlying, to possibly make up to 5.5% if the stock is down 10% in the next 3 trading days.


On the flip side, with 17% short interest and sentiment already pretty bearish, if you thought the company could post a beat and raise, then the stock could be on its way back to a gap fill to the high $20s.

If I were inclined to play for a short squeeze, I would consider:

Bullish Trade Idea: Buy X Nov 3rd weekly 26 / 28 call spread for 55 cents
  • Buy 1 Nov 3rd 26 call for 85 cents
  • Sell 1 Nov 3rd 28 call at 30 cents


Break-evens on Nov 3rd:

Profits of up to 1.45 between 26.55 and 28 with a max gain of 1.55 at 28 or higher

Losses of up to 55 cents between 26 and 26.55 and max loss below 26.

Rationale: Again, this is fairly binary into the event, but defines risk into an uncertain event. If the earnings provided relief the stock could be up sharply on the open.