Steel producer U.S. Steel (X) fell 5% last week after President Biden refused to allow the company’s sale. Over the past year, shares are now down over 33%. One trader sees a short-term rebound following the selloff.
That’s based on the April $40 calls. With 100 days until expiration, 21,059 contracts traded compared to a prior open interest of 333, for a 63-fold rise in volume on the trade. The buyer of the calls paid $1.28 to make the bullish bet.
U.S. Steel shares got knocked down to just under $31 on the news, so shares would need to rally by $9, or about 29%, for the option to move in-the-money. Shares remain close to their 52-week low of $26.92.
Part of the rationale for selling U.S. Steel is to create a better economy of scale, and compete with modern global facilities that also have lower labor costs. U.S. Steel saw revenues slide 13% over the past year and earnings growth collapsed by 60%.
Action to take: Interested investors should invest in the more efficient steel producers of the world, as they’ll fare better in this highly competitive commodity-based market.
For traders, the April $40 calls play well for a very short-term bounce higher in shares. Longer-term, put options may be attractive given U.S. steel’s lack of competitive advantage and high relative costs.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.
