Steel stocks have been performing well lately although I’m not excited about the sector. I liked the action in Wednesday’s trading and there are a couple of names I follow on my Watch List for steel. The two major ones are United States Steel (X, $23.47, up $0.15) and Reliance Steel & Aluminum (RS, $27.46, up $1.07). Although Reliance showed the better gain yesterday, U.S. Steel is more active. What I mean by “active” is U.S. Steel averages about 14 million shares traded a day compared to under 2 million for Reliance.
In other words, the stock is more liquid which means the option pits are more active in the higher volume trading stocks. You will also notice that the difference between the bid and ask prices for the more active options are usually 5 cents and sometimes pennies. In the less active option markets for other stocks, the option you are looking at may have a 10 cent difference between the bid and ask.
Usually, when a sector is “hot” the top two or three names move higher than the other stocks in that sector and when trading options you want to look for little things like this. When I looked at the options for these two stocks it was clear that U.S. Steel is more liquid which means we can get better pricing.
I’m looking to “day trade” the U.S. Steel April 25 calls (XOKDE, $1.70, unchanged) for Thursday and Friday and I’m looking to get into these options at $1.40 or better. My initial target will be $2 with a stop at half my entry level level price.
If, after 10am, the calls are trading for $1.40 or under, go ahead and pull the trigger. The stock could be due for a slight pullback as it has started to challenge its 50-day moving average of $25.30. However, U.S. Steel hit a high of $25.74 so it actually penetrated that level and fell back.
Don’t chase when we can replace. If the calls open high than yesterday’s closing price of $1.70 then set your limit at $1.40 and see if the stock comes back to us. If we don’t get into this trade, we still have others open positions so we should enjoy some gains if the rally is broad-based. Having said all of that, the futures are are big-time this morning and we are looking at a strong open which means we may not be able to get into this trade at all.
I’ve been mentioning the 7,600-7,800 level for the Dow and the S&P holding 800 as the keys to the next leg up for the market. And I’ve been targeting Thursday as a huge rally. So far the market is acting like we thought it might and we could end the week with a bang. There will still be some headwinds but the market is looking good right now.
Rick Rouse
Rick@OptionsMentoring.com
