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U.S. Steel May 25/35 strangles being scooped up

Jud Pyle
0 Comments| April 21, 2009

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United States Steel Corp. (NYSE: X, Stock Forum) shares have been on a wild ride over the past nine months, falling from a late-June peak of $186.93 to a low of $16.88 on March 2. In the past six weeks or so, the stock has been fighting back, up about 60% from its lows to crack the $27 level. (In yesterday's action, X was down more than 9%).

Needless to say, the steel producer is a volatile stock, and things aren't terribly likely to settle down in the next few weeks, with earnings due on April 28. Analysts have projected a loss of $1.69 per share, down from a year-ago per-share profit of $1.77 (talk about volatile!)

Some options traders are looking to take advantage of continued volatility in X shares, as they are scooping up the May 25/35 strangle by buying the 25 puts and the 35 calls, both of which are out-of-the-money. The 25-strike put is, however, closer to the money, with a higher delta, indicating that this investor may have more of a downside/bearish bias. About 6,000 contracts traded at each strike yesterday.

With volatility popping slightly higher from Friday's level, this straddle traded for, on average, about $2.35 for the spread, keeping risk relatively low (the combined premium, plus commissions). Return is potentially high if X either spikes higher or plunges lower after its turn reporting earnings next Tuesday.

The risk to buying this or other strangles is that the stock could fail to deliver a dramatic move around earnings (or before May expiration), resulting in a worthless expiration for both sides of the strangle. Additionally, a deflation in implied volatility could negatively impact the trade.


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