U.S. Steel (NYSE:X) Trading Strategies for Bulls and Bears

U.S. Steel Options Strategies Investors may have a renewed interest in U.S. Steel X Corp. this week after a Goldman Sachs analyst upgraded the stock. The covering analyst booted his overall rating to “buy” from “neutral,” lifted his earnings forecasts through 2013, and raised his 12-month price target by 23% to $75.

In a note to clients, the Goldman analyst referenced “overdone” worries about a recent dip in scrap prices and in fact projects rising steel prices. Against this backdrop, U.S. Steel is in a good position to benefit as it has “one of the best cost positions on the raw materials,” the analyst noted.

X shares rallied about 3% following this vote of confidence and are up 8% in 2011 so far. Investors looking to take a new position in X without buying the shares outright might consider alternatives from the world of option trading. On the flip side, those expecting a pullback in U.S. Steel could investigate bearish option strategies in lieu of shorting the stock, which carries unlimited risk if the shares move against the trader.

As a way to educate those who want to learn different ways option strategies might be used, we've detailed two option strategies below – one bullish, one bearish. These descriptions are for educational purposes only and do not constitute buy/hold/sell recommendations.

All prices below are from Thursday afternoon, when X was trading at $63.44, up nine cents.

Bullish Option Strategy: Call Condor

Investors expecting moderate upside from X can look at a call long condor, which consists of two long calls and two short calls traded simultaneously. Normally a neutral trading strategy a condor can present bullish exposure based on the structure of the strikes.

In this example, the investor pays a net debit of $3.90 for the following legs:

Buying the April 60 call
Selling the April 70 call
Selling the April 80 call
Buying the April 90 call

This condor is the equivalent to a simultaneous long 60-70 call spread and a short call spread using the out-of-the-money 80 and 90 calls. Breakevens are simply the lowest strike plus the debit paid ($63.90) and the highest strike less the debit paid ($86.10). If X is trading anywhere between these levels at expiration on April 15, the condor spread will be profitable.

Maximum profit, will occur should X be trading between the 70 and 80 strikes at expiration and is limited to the 10 dollar difference in the call spreads minus the premium paid for the condor. In this example, the most the investor can earn is $6.10 per condor.

The most the condor can lose is simply the net debit paid at the outset of the trade, or $3.90. Return on risk in this example is 156% ($6.10 maximum potential profit divided by the maximum potential loss).

The profit/loss chart below illustrates how this trade will look at expiration. A virtual trading account helps investors visualize this trade at different times in its life span (adjusting for changes in stock price and volatility as needed).

Profit and loss of U.S. Steel (X) long call condor

Bearish Option Strategy: Bear Put Spread

Those on the bearish side of the fence might consider a bear put spread, constructed by selling the April 62.50 put and buying the April 67.5 put, paying a total net debit of $3.00 per spread. Profit maximizes at expiration if X is trading below 62.50; the most this trade can earn is $2.00 (or the difference in strikes less the premium paid).

The maximum loss (the $3.00 premium paid) occurs if the stock is trading above 67.5 at expiration. Breakeven, meanwhile, is $64.50, or the long put less the debit paid. If X is trading south of this level when the options expire, the spread will be profitable. Option traders typically opt to exit positions ahead of expiration, however, either to take profits off the table or contain losses.

Profit and loss of U.S. Steel (X) bear put spread