Smart Money Is Making Steel Dynamics Great Again - VanEck Steel ETF (ARCA:SLX), Steel Dynamics (NASDAQ:STLD)

As a rule of thumb, whenever gold prices skyrocket, the underlying economic implications suggest that enterprises such as Steel Dynamics Inc STLD may struggle.

Soaring bullion demand indicates a shift away from cyclical and industrial plays toward safe-haven assets. Gold’s not generating earnings or paying dividends represents an indictment against risk-on behavior. Nevertheless, current unusual circumstances warrant a closer—and curiously optimistic—look at STLD stock.

To be sure, President Donald Trump's administration has ignited fears of a protracted and ugly trade war. While the tariffs that undergird the president's economic policies theoretically help domestic industries, it must be noted that global supply chains are exactly that — global. Retaliatory measures can hurt the U.S. economy and that's not something policymakers can easily ignore, given the challenges American households face.

Nevertheless, domestic steel producers cheered President Trump's 25% tariffs on steel and aluminum imports implemented last week. Despite a swift retaliatory move by the European Union, the domestic sector has conspicuously swung higher. In the trailing five sessions, the VanEck Steel ETF SLX has gained nearly 5%.

That said, the dispute over the core industrial commodity is complex. Steel producers have argued that the Trump tariffs close loopholes, enabling a more favorable environment for domestic investments and production. However, due to higher costs, downstream demand could suffer.

Still, money talks — and the smart money is signaling optimistic winds ahead.

Unusual Options Activity Shines the Spotlight on STLD Stock

Among the key indicators that retail investors should monitor is Benzinga's options scanner, which highlights unusual activity in the derivatives market. Essentially, options represent the playground of sophisticated investors. Therefore, transaction context or volume that exceeds normal or expected parameters may represent leading signals.

Unlike technical indicators such as moving averages, smart money transactions suggest what could happen next — not what did happen. To be fair, professional and institutional traders can get their forecasts wrong. However, these players have access to the best resources and are putting serious money on the table. Therefore, unusual options activity represents weighted opinions.

During the Tuesday session, STLD stock represented a key highlight in Benzinga's unusual options screener, with most of the major transactions carrying bullish sentiment. Arguably, most investors will focus on the acquisition of call options. Based on the strike price and the premium paid, it's reasonable to presume that STLD could poke its head above $139 by mid-May.

What's perhaps most intriguing, though, are the sold $140 puts, which expire on April 17. At the time of the transaction, the bid (or the premium received for the written/sold puts) was $14.60. Subtracting this figure from the strike price results in a breakeven price of $125.40. Stated differently, the put writer will take paper losses below this point (from an intrinsic value perspective).

Should STLD stock succumb to downside pressure, the put writer will naturally incur assignment risk. This setup strongly implies that the trader is comfortable owning Steel Dynamics stock at the perceived discounted price of $125.40 (the strike price minus the premium received). That's great intelligence for those who want to trade STLD straight up.

Finally, investors should recognize that STLD stock benefits from an upward bias. Using data since January 2019, a long position held for any given eight-week period has a 59.31% chance of rising. Under dynamic conditions of modest momentum — with STLD currently up 1.5% in the past five sessions — the probabilities don't materially change.

In fact, the empirical data suggests that the odds of long-side transactions improve.

Following the Smart Money to Profits

At this juncture, investors have two choices: heed the political warnings and avoid the steel industry altogether or follow the smart money flowing into STLD stock. Frankly, either approach has its set of justifications. Still, the adventurous type may want to consider the latter pathway.

Assuming that the bullish thesis pans out, a realistic upside target over the next four-and-a-half weeks is around $138. This forecast is based on median positive returns under baseline and dynamic conditions. Further, a market-realistic Monte Carlo simulation reveals a price projection of almost $136.

With the above market intelligence in mind, investors could buy the 130/135 bull call spread expiring April 17. This transaction involves buying the 130 call (at a time-of-writing ask of $400) and simultaneously selling the $135 call (at a bid of $210). The proceeds of the short call partially offset the debit paid for the long call, leading to a net cash outlay of $190, the most that can be lost in the trade.

To be clear, both calls are out the money (OTM); hence, the "cheap" net debit paid. Further, the trade prioritizes the statistical argument undergirding STLD stock and is even more aggressive than the smart money. However, the maximum payout of over 163% is extremely tempting.

For those who want to follow the institutional players more closely, the 125/130 bull spread expiring May 16 is available. However, the payout falls quite significantly to 85.2%. At the same time, it's arguably one of the most high-confidence trades one could make in the domestic steel market.

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