Is U.S. Steel (X) Strong Enough to Make a Comeback? Potential Trades for the Bullish and Bearish
Friday afternoon, Argus Research upgraded U.S. Steel (X) shares to “buy” from “hold,” setting a 12-month target price of $71. The firm said they believe the recent sell-off in steel stocks is overdone, and they expect to see improved fundamentals in the sector over the next few months. At the time of this upgrade, X shares were trading around $58.30.
Unlike brokerage and research houses, options traders can do much more than just “buy,” “sell,” or “hold.” The wide variety of option strategies available allow investors to place trades based on predictions for price action, volatility shifts, or other market influences. Below are two ways – one bullish, one bearish – that options investors might trade U.S. Steel. These are not buy-sell-hold recommendations, just potential strategies for bulls and bears.
Potential Trades in U.S. Steel (X) for the Bullish
For those who might agree with Argus analysts, you might consider selling a bull put spread. This morning with the stock trading at 60.50, the April 60/40 put spread can be sold for about $3.50 each (by shorting the April 60 put and buying the April 40 put simultaneously). The maximum profit is this credit collected; the maximum loss is $16.50, putting the return on risk at about 21%. If X shares are trading above $56.50 when these options expire in six weeks, the trade will be profitable. X needs to be trading at or above 60 in order to yield the maximum profit.
Potential Trades in U.S. Steel (X) for the Bearish
Investors who disagree with Friday’s upgrade might consider selling a bear call spread, by selling the October 65 call and simultaneously buying the October 75 call, collecting a credit $3 for each short spread. This net credit is the maximum potential profit, and the maximum potential loss is $7 (the difference in strike prices minus the credit collected). Return on risk, therefore, is 42% between now and October options expiration. In order to earn the maximum profit, X shares need to be trading at or below $65 when these options expire. Breakeven for this strategy is $68.
So, options traders, are you with Argus Research or against them? What are your thoughts on U.S. Steel’s next move? The comments are yours.
Photo Credit: monkeyc.net
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