Steel-related companies have rebounded from their lows of last
week, but one trader thinks they may be heading back down.
optionMONSTER's Depth Charge tracking system detected a bearish
ratio spread on the Market Vectors Steel (
) exchange-traded fund, which included the purchase of 1,500 June
60 puts for $3.40 and the sale of 2,250 June 55 puts for $1.50.
The SLX fell 1.24 percent to $61.80 in early afternoon trading. The
fund is holding most of its gains after surging 8 percent
yesterday, but is down 13 percent in the last month. It's been
struggling along with the materials sector as investors worried the
Greek debt crisis would poison the global financial system and that
Chinese officials may attempt to slam the brakes on the country's
Today's option trade is designed to leverage a limited correction.
Selling a greater number of downside options lowered the investor's
cost basis to $1.15 per contract owned.
The trade will generate a maximum profit of 334 percent if the
SLX closes at $55 on expiration. The gains will erode below that
price and turn to losses below $45. The $55 level is also potential
support on the chart, so traders may think further downside
below it is unlikely.
The number of contracts sold short exceeded those held long by 3 to
2, which is why the strategy is known as a ratio spread.
SLX's largest holdings include Vale and Rio Tinto, which mine
iron ore, and Luxembourg-based steelmaker ArcelorMittal.
The ratio spread pushed total options volume in the fund to nine
times greater than average. Put account for 93 percent of the
(Chart courtesy of tradeMONSTER)
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