Trade Closed: I'm closing this out as the price target was met and the spread opened.
It's now closed out nicely and profitable (see Bret's comments below, 43% gain and/closed).
OCT 27, 2015 | 8:00 AM EDT
Intermediate Trade: United States Steel Corp
- I prefer the bullishly biased synthetic call, expiring in April.
Be in the game long enough and you begin to believe in déjà vu when it comes to trading, as well as investing. One of those déjà vu kinds of things is this: look long and sharply hard at buying a stock/sector when a big name brokerage firm that has been a bull in the stock/sector finally gags and then says to the clients to sell that stock/sector.
The reason for that venerable dictum is that if a "big" firm is so bearish on a stock/sector so as to admit they were long and wrong, they have an awful habit of doing so just as the stock/sector is making its bottom for that longer-term cycle. Presumably they were bullish if not quite so, probably for years up until this inflection point in price and time when they turned "seller". Many times at this price and time, these firms will make themselves right as they get their clients out of that stock/sector. The trading question thus begged is this: who then, after all that selling carnage, is left to sell the stock/sector after the dust from selling it settles?!? Answer most times is: hardly anyone.
My mentor taught me that the longer and the more detailed the report, the more the market has already priced in that elongated and detailed information about a stock/sector. So without further ado and being as brief as possible, note that when I see/read/hear of some big firm's analysis on a stock/sector in which they have moved as per their analysis into the capitulation mode (read: SELL!) my work (especially if I follow that stock/sector) signals that at the very least a speculative, bullishly biased trade might be soon setting up.
Yesterday, Merrill Lynch moved from being a bull on the steel sector to "throwing in the towel." As of now I am using any stock's Aug. 25 low and its Sept. 30 low as being key trading/price level(s), as those two dates so far mark the climax of the two bear cycles the bulls suffered from June into early October of this year.
Stocks always move from strong hands to weak hands and back again to strong hands that sell to weak hands (ad infinitum). Thus those two price levels and their two dates are what I consider price levels when strong hands bought from weak hands. So, the Aug. 25 low for U.S. Steel (X) was $14.25 and the Sept. 30 low was $10.21. Yesterday, X closed at 10.63. Also take note that the 52-week low for X is $9.66, that price trading on Oct. 1 (most likely the follow-thru gag point hit somewhat in delayed fashion, that date being the next trading day post that Sept. 30 trading date).
As of the latest NYSE Short Interest Report, 40% (58 million shares) of X's float was held as being short stock. Ah, that's is a rarified percentage of the float bet for any stock to keep declining in price, much less for a company that has been in business since 1901. And it's not like X has a poor ISS QuickScore, as the ISS gives X a 2 rating (1 is the highest/best ISS rating a company can receive). X has over $1 billion in cash, and a current ratio of less than one to three (cash to debt), which is not a ratio to go willy-nilly shorting against!
The trade tactic I prefer now for X is the bullishly biased synthetic call, expiring in April.
Trade: buy 100 shares of X and buy 1 X April 11 put for a total debit of $12.30. The total risk for the trade is 2.30 points. The suggested target to close for a gain is a total bid (long stock + long put) of $13.30 and the suggested target to stop out the trade is a total bid of $11.30.
At the time of publication, Skip Raschke held no positions in the stocks or issues mentioned.