New Trade Alert for US STEEL
US STEEL Buy July $17 Call @$5.75 or less
Risk Rating: 3 (1 = lowest 5 = highest)
Above Break Even Probability: 41%
Max Loss Probability: 29%
Macro Market March
New Year cheer has stocks up in 2019 now above the halfway mark of the drop from the top.
This epic recovery rally has S&P back within the sideways 2600 to 2800 range of most of 2018.
China tariff worries shook up stocks in December giving back the gains.
Steel become a weapon in the war of wills in the trade battle.
Cut in half, US Steel dropped from $45 to under $20 by December. The August, September, October $30 level is the first upside objective as the midpoint price pivot.
US 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 X trading at $21.50, for example, an In The Money $17 strike option currently has $4.50 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 July X $17 Call at $5.75 or better.
Looking at X, the $17 option strike level gives you the right to buy shares at a big discount and below annual low. This In The Money option gives you the right to buy the stock with absolutely limited risk.
The July option has six months of time for bullish development.
The maximum loss is limited to the $575 or less paid per option contract if X is below $17 the third Friday in July of 2019.
The upside, on the other hand, is unlimited. The In The Money option has a delta of 80% 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 ($17 strike plus $5.75 option premium). That about $1 higher than the present price.
The objective is the $30 sideways range. If X moved to that $30 level, the option investment would be worth $13.00 for a 100%+ gain.