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Daily Options Intelligence Report

Steel profits on the table despite gloomy share prices

Tue, Apr 14 2009, 16:39 GMT
by Andrew Wilkinson

Interactive Brokers LLC  |  View company's profile

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X – United States Steel Corporation – The integrated steel company edged onto our ‘most active by options volume’ market scanner after one investor was observed establishing a call option credit spread. The producer of iron ore pellets and flat-rolled products experienced an early rally of about 1% before falling back to the current share price of $26.80 amid reports that U.S. raw steel production rose 7.1% last week. While the increase in steel production to 1.033 million tons from the previous week’s output of 965,000 tons is a good sign, we note that production of raw steel is currently down by 52.1% since last year. At the May 25 strike price, one investor sold 10,000 calls at the in-the-money May 25 strike price for a premium of 3.43 apiece and purchased 10,000 calls at the May 30 strike for 1.44 per contract. It appears that this investor likely purchased the 25 strike calls at a weighted average price of 2.11 on April 1, when shares closed at $22.62. The net credit enjoyed on the trade today of 1.99 could be seen as a partial profit on the existing long call strategy, or as a discount on rolling up to a higher strike price. Either way, the investor is rolling over his long steel position today, even if the steel mills are rolling less steel!

MT – ArcelorMittal – Shares of the world’s largest steelmaker have slipped by nearly 2% to stand at $26.70 amid news that it plans to close the doors to a facility in Indiana. According to one news report, MT is shutting down the plant, which produces steel bars for the auto industry, due to declines in demand. It appears that the same rollover strategy as described above for United States Steel Corporation is occurring at Mittal today. The volume pattern has the identical hallmark, with calls purchased at the 24 strike on April 1 when Arcelor’s share price closed at $21.58. We believe that this investor today sold 9,500 calls at the now in-the-money May 24 strike price for a premium of 3.94 and simultaneously purchased 9,500 calls at the May 28 strike for 1.97 apiece. In this case the investor is taking profits off the table amounting to almost 2.0 per contract, while retaining a bullish posture and rolling up the strike to the 28 line. The similarities between the trades observed in MT and X provide us with good insight into what some option investors expect from the steel giants in the near future.

TIF – Tiffany & Co. – It would appear that investors are hoping that today’s knee jerk reaction to a dismal and out of line retail sales report will be short-lived. Shares at lux-retailer, Tiffany are down from early-in-the-session gains at $23.61 while bullish activity was seen in options expiring at the end of the week. Call buyers bought more than 5,000 lots at the nearby 24.0 strike at a 57 cent premium, implying instant gratification later this week. The series carries practically no open interest indicating a real surge of Dutch courage this morning. At the 25.0 strike investors also snapped up 6,600 calls paying a 25 cent premium. In this case the breakeven share price suggests a continued rally of 6.9% from today’s price. Having reached a double-bottom at $17.00 per share in March, some investors clearly feel that the recent consolidation between $21-$24 is a sign of better things ahead. It’s a brave man who forecasts better times for luxury retailers following today’s dismal retail data.

JCG – J Crew Group Inc. – The same picture was painted by option bulls in apparel-retailer, J. Crew, whose shares were 2.8% lower at $15.95 this morning. Call-to-put volume indicated 10-times the bullish positioning earlier today as investors either forgot about Friday’s options expiration or felt that the retail sales data might by quickly revised upwards. Investors snapped up 7,000 call options at the 17.5 strike paying 29 cents for the privilege, indicating the need for a 9.7% gain in the shares by Friday’s close.

AIG – American International Group, Inc. – Shares of the insurance and financial services company have rallied by approximately 15.5% to $1.64. AIG jumped onto our ‘most active by options volume’ market scanner after one investor initiated a spread in the November contract. It appears that at the November 2.0 strike price, one individual took advantage of the share price rally by selling 7,200 calls for a premium of 59 cents. He then used the 59 cents to fund the purchase of 7,200 in-the-money puts at the same 2.0 strike for 1.00 apiece. The net cost of the transaction amounts to 41 cents and sets this bearish investor up with downside protection on the stock. This strategy protects the trader from a decline in the share price at AIG and could be an inexpensive hedge against a long stock position, making it hard to determine whether the option combination is a purely bearish play or part of a more sophisticated position.

Published on  Tue, Apr 14 2009, 16:40 GMT

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