An Option - To Go Either Way

10/20/2006 12:00 am EST


Beth Gaston Moon

, Schaeffer's Investment Research, Inc.

Known for their thorough technical research, editors and analysts at perennial Money Show favorite, Schaeffer's Investment Research, demonstrate that they also have solid knowledge of fundamental factors related to share movements. Here, Beth Gaston-Moon depicts that succinct...

"AK Steel (AKS NYSE) manufactures carbon, stainless, and electrical steel products. The speculative crowd has descended upon the November 15 call (AKS KC), a slightly in-the-money position that has seen more than 14,500 contracts cross the tape today. Already with slightly more than 4,000 contracts in residence, the bulk of today's volume will likely translate into new open interest tomorrow. The 15 call strike is already home to heaviest open interest in the October, November, and December series, accounting for nearly 32,000 open 15 calls. The stock's move above this threshold of potential structural resistance is a testament to its strength.

"The speculative crowd has turned its interest to AKS as its union gathers to vote on the company's second final contract offer.

"Look for today's action to have an impact on the stock's Schaeffer's put/call open interest ratio (SOIR)--at 0.27--already within 3% of an annual low. Should today's contracts build the open-interest reading at the November 15 strike, this reading could peg a new nadir (which is cause for modest concern from our contrarian perspective).

" The stock's price action justifies this bullish speculation, zooming nearly 40% higher during the past four weeks. Rebounding from technical support in the 11.50 region, it has ridden the wave of broader-market strength to its highest point since mid-April. The shares have regained control of their 10-week and 20-week moving averages, forcing these trendlines into a bullish crossover for the first time since early January.

"With call buyers licking their chops and AKS up such a hefty margin in such a short period of time, I wonder if the stock has risen too far, too fast. If so, it could be on the precipice of a pullback. But more than 13% of the company's float is sold short. It would take about 6 1/2 days (at average daily volume) to dump all of these bearish bets. With the stock exhibiting a solid rally, these bears could begin to relinquish their positions, creating some additional buying demand.
"Additionally, only four analysts follow the shares, one with a "buy" and two with "strong sells." Added coverage or an upgrade or two could continue to feed the equity's rally. AKS earns a Schaeffer's Equity Scorecard rating of 6.0, which seems about right from a risk/reward perspective. Options players are crowding the bullish bandwagon, but short sellers and skeptical analysts could produce some positive attention. I'm keeping this one on my radar but exerting a degree of caution."

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