Trading Steel Options

T.D. Thompson — Tue, 22 Jun 2010 02:41:41 +0000

There is opportunity in steel price volatility. North American steel producers are pressuring officials in Canada, Mexico, and the USA to put pressure on China to revalue the Yuan. Their goal is a “large and sustained appreciation” of the Chinese currency. A more expensive Yuan would drive up the price of Chinese steel and make North American steel more competitive. The argument goes that a stronger Yuan would lead to a faster economic recovery in the West, more jobs, and more wealth. Trading steel options could be lucrative at this moment as stock prices of US steel manufacturers are severely “corrected” and ready to rebound. Bad times for owning stocks are often good times for trading options. The issue of currency rate changes, possible bans on Chinese imports if congress declares China a currency manipulator, and the question of a double dip recession all lead toward stock price volatility and possible profits in trading steel options.

There are several factors that could affect steel prices, the price of steel stocks, and profits in trading steel options. The currency manipulation issue is about to move into congress where there is substantial bipartisan support for labeling China a “currency manipulator.” If a bill passes administration will be forced to take action through the IMF and WTO. US industries, including steel manufacturers, will be allowed to sue in US courts for damages. Whether these actions change the price of steel and the profits of US steel companies is not as important is the various perceptions that will tend to drive stock prices up and down. There are various kinds of options trading that could be applied to trading steel options. Certainly, if one believes that US steel makers have taken their hit and are due for an upswing, buying calls on these stocks could be lucrative. If one believes that US efforts to adjust China’s currency are going to be successful then buying calls could be doubly effective. If it is the volatility of steel prices and the price of steel stocks that seems most worrisome, then using a straddle strategy (long) will position the trader to profit whether steel stock prices rise or fall.

As usual the point of all this is not to go out and buy or sell options on steel stocks or to avoid doing so. It is to find opportunity in the chaos that is the larger equity market of today. The trader will need to stay abreast of changes in the larger economy and in the fortunes of individual companies finding markets for new products. The use of covered options trading or uncovered options trading, a short straddle or a long straddle, will have to do with individual options trading strategies based upon reasonable expectations what the market will do before given options expiration dates. Although you may expect the Chinese to revalue the Yuan or for their economy to stagnate under a load of debt the question is how soon and how soon is critical to options trading. If China decreases steel production how long will stockpiles last and how soon will prices climb in the West? Trading steel options could be quite lucrative, depending upon what happens in many arenas, and how soon.

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Trading Steel Options

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