Options for stock investors. A better way to trade.

New Trade Alert – AK Steel

New Trade Alert for (AKS)

AK Steel Buy January 2019 $4 Call @$2.75 or less

 


Risk Rating: 3.5     (1 = lowest   5 = highest)

Above Break Even Probability: 39%

Max Loss Probability: 27%


Steel to Strengthen

 

Commodities comeback has been the 2018 catalyst for stocks as metals, miners and energy have rebounded to finally recover and rally.

 

A great example of this is US Steel now up 18% in the last year after a drop to minus 40% last summer.

 

 

The broad market barometer S&P is up an impressive 6% in 2018 after only three weeks to keep momentum moving.

 

Compare that to AK Steel down 35% in the last 52 weeks waiting for the uptrun.  AKS is stuck from mostly $5 to $7 since last April with the extreme low at $4.  

 

The next upside target is at $9 on a range breakout.

 

 

Above that AKS has resistance at the $11 double top from 2015 and 2017 peaks. 

 

 

 

AK Steel long call options can provide the staying power in a potential larger trend extension.  More importantly, the maximum risk is the premium paid for buying the option.   

 

The Options Way: Unlimited Upside Potential with Limited Risk 

One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.

 

Choosing an option can sometimes be a daunting task with all of the choices and expiration months.  Simply put, traders want to buy a high probability option that has enough time to be right.

The option strike price is the level at which you have the right to buy without any obligation to do so.  In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.  

There are two rules options traders need to follow to be successful.

Rule One:  Choose an option with 70%-plus probability.  The Delta is a measurement of how well the option reacts to movement in the underlying security.  

 

It is important to buy options that payoff from only a modest price move.  There is no need to ONLY make money on the all but infrequent price explosion.

Any trade has a fifty/fifty chance of success.  Buying options ITM options increase that probability.  That Delta also approximates the odds that the option will be In The Money at expiration.

 

Buying better options is more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.  
 
With AKS trading at $6.25, for example, an In The Money $4 strike option currently has $2.25 in real or intrinsic value.  The remainder of any premium is the time value of the option.

Rule Two: Buy more time until expiration than you may need —   Time is an investor’s greatest asset when you have completely limited the exposure risks. 

Traders often buy too little time for the trade to develop.  Nothing is more frustrating than being right but only after the option has expired premature to the market move.

 

 

Trade Setup: I recommend the January 2019 AKS $4 Call at $2.75 or better.

Looking at AKS, the $4 option strike level gives you the right to buy shares at a big discount and at annual low.  It is also solidly below the bottom of the trading channel.  This In The Money option gives you the right to buy the stock  with absolutely limited risk.

The January 2019 option has one year of time for bullish development.

 

The maximum loss is limited to the $275 or less paid per option contract if AKS is below $4 the third Friday in January of 2019. 

 

 

The upside, on the other hand, is unlimited. The In The Money option has a delta of 86% so it will behave much like the stock for a fraction of the cost of owning the shares.

 

The trade expiration break even is at $6.75 or above at expiration ($4 strike plus $2.75 option premium).  That about 50 cents higher than the present price.

 

 

The objective is the $9 target from the $5 to $7 sideways range.  If AKS moved to that $9 level, the option investment would be worth $5.00 for a gain of nearly 100%.

 

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