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The Trade War Keeps Hitting This Stock

The Trade War Keeps Hitting This Stock

“U.S. Steel Corp. (NYSE: X) has now lost much of the ground it gained when President Donald Trump implemented his steel import tariffs less than two years ago,” according to a recent Bloomberg report.

X weekly chart

“Back then, Chief Executive Officer David Burritt hailed Trump’s tariffs and the company responded by restarting two blast furnaces and rehiring steel workers.

Now, U.S. Steel is facing harsh scrutiny after delivering a barrage of bad news this week that included idling its giant plant outside Detroit and laying off as many as 1,545 workers.

U.S. steelmakers have faced slowing demand for their products, and U.S. Steel has been particularly hard hit because of aging plants that are less efficient than rivals’ with newer technology.

That’s led to a spate of corporate operational initiatives under different names that have shifted multiple times since 2014.

The changing strategies “raise concerns that there’s no long-term, overriding execution capability to improve competitiveness,” Richard Bourke, a senior credit analyst at Bloomberg Intelligence, said in a note.

“Cash costs from layoffs will likely exceed savings from the cuts, in our view.”

Bourke cited the “Carnegie Way,” the Asset Revitalization program, steel technology projects and Big River investment among the “ever-changing operational priorities.”

U.S. Steel stock has sunk by about a third this year, hitting the lowest since 2016 in October, even as the broader U.S. equity market hit all-time highs.

X daily chart

The [recent] plunge comes amid concern over how well the company will be able to supply steel for critical automotive products as it moves some production next year from the Detroit area to its operations in Gary, Indiana.

“They just idled their main automotive mill,” said Dan DeMare, a regional sales manager for Heidtman Steel, an Ohio-based steel distributor.

“They have bet everything on their commercial ability to be viable and offer the cost to market that’s required, and they’re going to have facilities, equipment and a plan to execute. They’ve failed miserably at that so far.”

The company’s [recent] announcement was met with a mixed reaction from Jefferies LLC, which said that while the loss was worse than analysts had expected, there would be benefits for the industry as a whole from the plant closures.

Although the loss “likely surprises most investors, its proactive move to permanently idle Great Lakes Works is laudable,” analysts including Martin Englert said in a note.

“We see the shuttering of U.S. flat-rolled steelmaking capacity as a broader incremental positive for the domestic industry into 2020 and beyond given the numerous expansions planned by peers.”

The Trump administration put 25% duties on imported steel in March 2018, fulfilling a campaign promise to help the steel industry, which he said was suffering from dumping by actors like China.

Michigan was narrowly won by Trump in 2016, helping pave his way to the White House.

That didn’t help the production facilities near Detroit.

“Current market conditions and the long-term outlook for Great Lakes Works made it imperative that we act now,” CEO Burritt said in a statement Thursday.

It was a change from his comments in 2018 when the company restarted two blast furnaces in Granite City, Illinois. Back then, the CEO hailed Trump’s tariffs for creating the market conditions to boost supply and re-hire workers.

A Trading Strategy To Benefit From Weakness

A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.

In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.

Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.

One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.

Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.

The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.

bear call spread

Source: The Options Industry Council

While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.

You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.

Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

A Bear Call Spread in X

For X, we could sell a February 21 $11 call for about $1.03 and buy a February 21 $13 call for about $0.39. This trade generates a credit of $0.64, which is the difference in the amount of premium for the call that is sold and the call.

Remember that each contract covers 100 shares, opening this position results in immediate income of $64 The credit received when the trade is opened, $64 in this case, is also the maximum potential profit on the trade.

The maximum risk on the trade in X, is about $136. The risk can be found by subtracting the difference in the strike prices ($200 or $2.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($64).

This trade offers a potential return of about 47% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if X is below $11 when the options expire, a likely event given the stock’s trend.

Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $136 for this trade in X.