Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

X Marks The Spot: Use Cash-Secured Puts To Make U.S. Steel Shares More Affordable

By Investing.com (Tezcan Gecgil/Investing.com )Stock MarketsOct 06, 2021 08:37AM ET
www.investing.com/analysis/x-marks-the-spot-use-cashsecured-puts-to-make-us-steel-shares-more-affordable-200604076
X Marks The Spot: Use Cash-Secured Puts To Make U.S. Steel Shares More Affordable
By Investing.com (Tezcan Gecgil/Investing.com )   |  Oct 06, 2021 08:37AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Shareholders in United States Steel (NYSE:X) have enjoyed robust returns so far in 2021. X shares are up about 33.5% so far this year, hitting a 52-week high of $30.57 in mid-August. By comparison, the Dow Jones Iron & Steel Index is up 82.5% in 2021.

United States Steel Weekly Chart.
United States Steel Weekly Chart.

Since its recent high in August, X shares have lost about 26.7%. Now, the stock is hovering at $22.40. US Steel's 52-week range has been $7.59 - $30.57.

Despite the recent decline in price, Wall Street is still bullish on the company in the long run. According to 10 analysts polled by Investing.com, the 12-month median price forecast is $34.33, implying a return of over 53%.

Consensus Estimates.
Consensus Estimates.

Chart: Investing.com

In recent weeks, we discussed various supply-and-demand dynamics for steel, a key material used in engineering and construction worldwide. China is both the largest producer and consumer of steel.

According to metrics published by the World Steel Association:

“Steel demand will grow by 5.8% in 2021 to reach 1,874.0 million tonnes (Mt), after declining by 0.2% in 2020. In 2022, steel demand will see further growth of 2.7% to reach 1,924.6 Mt.”

So today, we look at how bullish investors might consider selling cash-secured put options on X stock. Such a trade could especially appeal to those who want to receive premiums (from put selling) or to possibly own United States Steel shares for less than their current market price of $22.40.

We previously discussed the detailed mechanics of cash-secured put selling using Exxon Mobil (NYSE:XOM) stock. Readers who are new to put selling may want to consider reviewing that article.

Selling Cash-Secured Puts On X Stock

Investors who write cash-secured puts are typically bullish on a stock during the timeframe that extends to the option expiry date. They generally want one of two things–either to:

  • Generate income (through the premium received by selling the put); or
  • Own a particular stock, in spite of finding the current market price per share higher than what they would like to pay.

A put option contract on United States Steel stock is the option to sell 100 shares. Cash-secured means the investor has enough money in his or her brokerage account to purchase the security if the stock price falls and the option is assigned. This cash reserve must remain in the account until the option position is closed, expires or the option is assigned, which means ownership has been transferred.

Let's assume an investor wants to buy X stock, but does not want to pay the full price of $22.40 per share. Instead, the investor would prefer buying the shares at a discount within the next several months.

One possibility would be to wait for United States Steel stock to fall further, which it might or might not do. The other possibility is to sell one contract of a cash-secured X put option.

So the trader would typically write an at-the-money (ATM) or an out-of-the-money (OTM) put option and simultaneously set aside enough cash to buy 100 shares of the stock.

Let's assume the trader is putting in this trade until the option expiry date of Jan. 21, 2022. As the stock is currently $22.40 at time of writing, an OTM put option would have a strike of 22.00. So the seller would have to buy 100 shares of United States Steel at the strike at $22.00 if the option buyer were to exercise the option to assign it to the seller.

The X Jan. 21, 2022, 22-strike put option is currently offered at a price (or premium) of $2.38.

An option buyer would have to pay $2.38 X 100, or $238, in premium to the option seller. This premium amount belongs to the option seller no matter what happens in the future. This put option will stop trading on Friday, Jan. 21.

Risk/Reward Profile For Unmonitored Cash-Secured Put Selling

Assuming a trader would enter this cash-secured put option trade at $22.40, at expiration on Jan. 21, 2022, the maximum return for the seller would be $238, excluding trading commissions and costs.

The seller's maximum gain is this premium amount if X stock closes above the strike price of $22.00. Should that happen, the option expires worthless.

If the put option is in the money (meaning the market price of United States Steel stock is lower than the strike price of $22.00) any time before or at expiration on Jan. 21, this put option can be assigned. The seller would then be obligated to buy 100 shares of X stock at the put option's strike price of $22.00 (i.e., at a total of $2,200).

The break-even point for our example is the strike price ($22.00) less the option premium received ($2.38), i.e., $19.62. This is the price at which the seller would start to incur a loss.

On a final note, the calculation of the maximum loss assumes the put seller was assigned the option and purchased 100 shares of United States Steel at the strike price of $22.00. Then, in theory, the stock could fall to zero.

If the put seller gets assigned the option, the maximum risk is similar to that of stock ownership but partially offset by the premium (of $238) received.

Bottom Line

Cash-secured put selling is a moderately more conservative strategy than buying shares of a company outright at the current market price. This strategy can be a way to capitalize on the choppiness in X stock in the coming weeks.

Investors who end up owning United States Steel shares as a result of selling puts could further consider setting up covered calls to increase the potential returns on their shares. Thus, selling cash-secured puts could be regarded as the first step in stock ownership.

X Marks The Spot: Use Cash-Secured Puts To Make U.S. Steel Shares More Affordable
 

Related Articles

X Marks The Spot: Use Cash-Secured Puts To Make U.S. Steel Shares More Affordable

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (3)
Jeni far
Jeni far Oct 06, 2021 1:26PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
hlw good app
Min Min
Min Min Oct 06, 2021 12:52PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Sher Alam
Sher Alam Oct 06, 2021 12:52PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
hello
Min Min
Min Min Oct 06, 2021 12:52PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email