Trader bucks rebound in steel ETF

By David Russell,

Shutterstock photo

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 ( SLX ) 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.

SLX Chart 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 red-hot economy.

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 activity.

(Chart courtesy of tradeMONSTER)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing Options
Referenced Stocks: MT , RTP , SLX , VALE

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