Options Update: United States Steel Put Volume Swells on Bearish UBS Note

Put option volume on United States Steel (X | Quote | Chart | News | PowerRating) has spiked to more than 4 times the equity's daily average in today's trading, as traders are chasing the stock's more than 4% decline on the session. Prompting the plunge, UBS steel analyst Timna Tanners reiterated the shares with a "sell" rating, lowered her price target to $23 from $25 per share, and cut her fiscal 2009 earnings estimate for the company to 55 cents per share.

Tanners wrote in a research note that she expected weaker results in U.S. Steel's tubular, or pipe, business, which is tied to the oil and gas industry. "Drilling permits and rig counts suggest sharply worse tubular prices and volume," she wrote. Steel companies were already under pressure from a declining global economic environment, and many traders have become fearful that pricing will soon take a hit as conditions worsen.

In the options pits, traders have sent more than 21,000 X puts across the tape so far today, placing the security on our Intraday Volume Explosion List. About one quarter of this volume has changed hands on X's soon-to-expire February 25 put. With much of this activity trading at the ask price, and volume easily exceeding open interest on this front-month option, it would appear that traders are speculating on continued declines for X through the end of the week.

The Anatomy of a United States Steel Put Position

Taking a closer look at the February 25 puts, 3 blocks totaling 1,090 contracts traded at 9:47 a.m. Eastern time at the ask price of $0.75. Assuming that these contracts were all placed by the same trader, the total outlay for this position would be $81,750 -- ($0.75 * 100)*1,090 = $81,750. For this trade to reach breakeven, X would need to fall about 11.2% from yesterday's close at $27.33 to $24.25 at expiration, which takes place this Friday. The maximum loss for this position is the initial outlay of $81,750.

By entering this trade, the investor is indicating that he expects X to plunge sharply by Friday. The position is off to a stellar start, as the shares have fallen more than 4% so far today. That said, let's take a look at the stock's technical and sentiment backdrops for any additional drivers for this trade.

Getting Technical

Technically speaking, falling commodity prices have taken their toll on X. The stock is off more than 74% during the past 52 weeks, and has declined some 26% so far in 2009. The security recently breached the lower rail of a trend channel between support at the 30 level and resistance at the 35 level. What's more, X's 10-day and 20-day moving averages are once again turning lower, creating a bearish cross in the process.

There is the potential for short-term support in the 25 area, as this region provided a base for X in December 2008. Should this support fail, however, the next bastion of technical support doesn't materialize until the round-number 20 level - site of X's November 2008 lows.

The Sentiment Drivers

As one would expect, investor sentiment toward X is heavily bearish. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.98 ranks above 82% of all those taken during the past year, revealing that options traders have been more negatively aligned on the shares only 18% of the time in the past 52 weeks.

However, data from the International Securities Exchange and the Chicago Board Options Exchange points toward a growing appetite for call options. Specifically, X's 10-day ISE/CBOE call/put volume ratio of 2.02 indicates that calls bought to open more than double puts purchased during the prior 2 weeks. This ratio also ranks above 75% of those taken in the prior 12 months, underscoring the severity of this rise in bullish activity.

On the other hand, short sellers are on the march, as the number of X shares sold short jumped by more than 5% during the most recent reporting period. A continuation of this trend could provide additional selling pressure for the security.

Finally, there is plenty of room for more analysts to follow UBS's lead. Currently, X sports 3 "buys," 6 "holds," and just 2 "sells." Meanwhile, Thomson Reuters reports that the average 12-month price target for X rests at $58.09 per share - a whopping 113% premium to the stock's Tuesday close. Any downgrades or price-target cuts could increase investor distain for the shares.

The Verdict?

I am a bit concerned that the 25 level could provide considerable support for X during the short term. As such, a February put option seems a bit too aggressive for my tastes at the moment. There does, however, seem to be additional downside risk for X shares. Personally, I would much prefer a March or April 30 put to better take advantage of any weakness in the security.

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