Options Activity for Hecla Mining Company (HL) and United States Steel Corporation (X)
Thursday, October 07, 2010

I hope that your trading is going well, as I know that members of S.O.M.E. are making the most of the market movements and their returns.

In today’s newsletter we look at speculative investors setting their sights on commodity stocks yesterday, as call volume ramped up on Hecla Mining Company (HL) and United States Steel Corporation (X). However, with so many traders on Wall Street betting on both stocks to slide, this option volume might not have been quite as bullish as you would expect.

Hecla Mining Company (HL)

Call volume climbed to 1.54 times the norm on HL yesterday, with approximately 13,000 contracts crossing the tape. By contrast, fewer than 1,900 puts changed hands on the commodity concern during the course of Wednesday's session, revealing a distinct bias toward optimistically oriented options.

On the International Securities Exchange (ISE) alone, traders on Wednesday bought to open 3,347 calls on HL, compared to just 84 puts. The equity's single-day ISE call/put volume ratio of 39.85 confirms a strong preference toward bullish bets over bearish.

In fact, HL now sports an inflated 10-day ISE call/put volume ratio of 10.92, as nearly 11 times more calls than puts have been purchased during the past two weeks. This ratio arrives in the 86th percentile of its annual range, indicating that speculators have rarely purchased calls over puts at a faster clip.

Likewise, HL's put/call open interest ratio (SOIR) arrives at 0.20, as short-term options players have accumulated five calls for every put among options set to expire within three months. This reading rests just four percentage points from an annual optimistic climax.

However, it's worth noting that short interest accounts for a robust 16.2% of the security's float, following a 4.3% increase during the past month. With so many bears betting on the stock to backpedal, it's possible that options traders have been buying HL calls simply to hedge their shorted shares.

On the charts, HL has notched a respectable year-to-date gain of 8.4%. Nevertheless, the stock has edged primarily sideways during the past year, ricocheting between support at $4.50 and resistance near the $7 level.

During the short term, traders' healthy appetite for calls could help to reinforce the upper rail of this sideways channel. HL's out-of-the-money October 7 strike is home to significant call open interest of 5,293 contracts, which could exert options-related pressure as expiration draws closer.

United States Steel Corporation (X)

Call players bombarded X on Wednesday, sending roughly 45,000 contracts across the tape -- or 1.37 times the equity's average daily call volume. By contrast, put volume fell short of the norm yesterday, with only 14,000 contracts changing hands.

Zeroing in on ISE action, speculators bought to open 6,799 calls on X Wednesday, compared to just 456 puts. The security's single-day call/put volume ratio of 14.91 reveals that bullish bets were nearly 15 times more popular than their bearish counterparts.

The day's optimistically skewed action continued a recent trend for X, which sports a 10-day ISE call/put volume ratio of 2.18. This ratio registers in the 77th annual percentile, as traders have scooped up calls over puts at a faster pace only 23% of the time during the past year.

In fact, X's SOIR is within striking distance of annual low territory. The current SOIR of 0.59 ranks below 98% of comparable readings taken during the past year, suggesting that short-term options traders have been more bullishly aligned just 2% of the time.

But, like HL, X has become a favorite target of short sellers. Short interest increased by 1.4% during the most recent reporting period, and now represents nearly 19% of the equity's float. In light of this data, it's possible that call buying on X is linked to an uptick in hedging activity by the shorts.

Further supporting this theory is X's lackluster price action, which doesn't exactly inspire bullish sentiment. The stock has shed more than 20% year-to-date, and its most recent rally attempts were rejected by its 50-week moving average and the round-number $50 region. During the short term, this double-barreled resistance could keep X under pressure.

Success is simple. Do what's right, the right way, at the right time.

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