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Bulls Rally Around United States Steel Corporation

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The steel stock's rising short interest could signal the purchasing of protective calls.

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United States Steel Corporation (NYSE:X) gained 2.6% during yesterday's bull market, despite BMO initiating coverage on the security with a "market perform" rating and a price target of $19. The stock's advance sparked an influx of options trading activity, too, as overall volume reached 70,000, more than doubling the typical amount. Most of that attention was focused on the call side, where approximately 53,000 contracts traded -- about three times the norm. The session's most active strike by far was X's November 25 call, where 15,234 contracts changed hands.

Because open interest soared at the strike -- adding over 15,000 contracts overnight -- it appears that new positions were created. Plus, since 79% of the volume crossed at the ask price, it's safe to assume a large portion of the trades were of the buy-to-open variety. The volume-weighted average price (VWAP) for the transactions was $0.25.

In order for the call buyers to profit, they need US Steel to advance considerably over the next two months. Specifically, with the shares hovering at $21.38, the traders are targeting at least an 18.1% advance to the breakeven point of $25.25 (strike price plus VWAP) by November options expiration. If X stalls short of the strike price, however, the most Wednesday's option bettors risk forfeiting is the initial premium paid.

It bears keeping in mind that X is scheduled to report third-quarter earnings sometime between October 28 and November 1, and this time around, Wall Street is calling for a per-share loss of $.44. Looking back, the company has topped analysts' bottom-line estimates in six of the past eight quarters, resulting in an average gain of 3.5% during the ensuing week. That should be music to the ears of yesterday's bulls.

However, it can't be assumed that every one of Wednesday's traders were of the optimistic stripe. After all, US Steel has shed over 10% year-to-date. On top of that, short interest increased 8.1% during the past two reporting periods, and now accounts for 29.4% of X's available float. In other words, it's possible that the call buyers were actually picking up insurance for their short stock positions, in case yesterday's rally continues.

This article by Alex Eppstein was originally published on Schaeffer's Investment Research.

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Twitter: @schaeffers
No positions in stocks mentioned.
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