Last year around this time I made some fantastic profits (over 500%) trading call options on AKS, as the underlying stock price traded from $15 to $25 in less than 10 weeks. Since April, the stock has gotten absolutely hammered, currently trading around $13.20, but the charts are indicating a big move could be right around the corner, and the options are pretty cheap. I know that it's going to sound really out of character, but I think I feel a bullish play coming on.....the set-up and my thoughts below.....
Below is the daily chart for AKS, and as annotated, we can see that price has been consolidating now for several months, and the ADX indicator has dropped back below 15 (for those who don't know the significance of a low ADX, you can click here and here for an explanation, and illustration of how this played out with Amazon a few months ago.)
The chart below is the same, just showing a longer time frame, where you can see big move we had last year beginning in November and ending in early January.
And the table below is a snap shot of the January Options chain for AKS.
As always, these charts and table are all clickable to get a larger view.
My underlying assumption is that we are going to see a year-end rally in AKS. The main reason why I think this is because the stock (and the entire Steel sector) has not participated at all in the run-up we saw across the broader markets over the past several months, and because of QE2, I think we'll see this rally continue. Lagging sectors like this can often times produce the most parabolic moves once they start to participate, and if you're correctly positioned, you can really make some large profits.
There are a number of different ways to play this. Remember, a low ADX means that a large move is likely coming, but it does not tell you in what direction. In this sort of situation, putting on a Strangle could be a good play....buying the January $14 calls and the January $12.50 puts would cost you $158 per contract at the current Ask prices.
Once again, I'm thinking that we stand a better chance of seeing a rally going into the end of the year, so instead of going with a Strangle, I'm more inclined to simply buy calls. The January $15 is the strike I like here, at $49/contract. This is a position that I would manage with a stop loss if the premium drops below $.25, or a 50% loss on the position.
Because I am bullish here and I think we are going to get a much larger move, in addition to the January $15's, I will be looking at buying the January $20's as well. This is a much more speculative play, and as such, should be done in an amount that is no more tha 1% the size of your entire portfolio. Translation: if your current portfolio is $100,000, you should limit your position size to $1,000 or less on the January $20's...if you do them at all. At the current Ask price of $.04, or $4/contract, and assuming a move in the stock price to $18 by mid December, this would net you 10x, or 1000% profits, and much more if the stock rises further. On the down side, since the options have such little value to begin with, you need to treat this as an all or nothing play...no stops. If it doesn't play-out, it will be a 100% loss on the position, hence my caution to limit the size of your position to less than 1% of your portfolio.
For those of you who are really aggressive, you can consider selling January puts in addition to buying January calls. Selling the $12.50 puts will fully fund the purchase of the $15 calls, while also leaving a $30 per contract credit in your account, or if you prefer to be a bit more conservative, you can sell the $11 puts, which won't completely fund $15 calls, but will give you more wiggle room, should this trade move in the wrong direction. Caution: writing options carries a high degree of risk is not for novice traders.
I'll let you know if/when I make any of these trades.
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