Trinity Industries Option Player Cashes In

Options trading has been extraordinarily heavy on steel stock U.S. Steel Corporation (NYSE:X) and rail industrial company Trinity Industries Inc (NYSE:TRN) in recent weeks. Here's a closer look at how options traders have been placing their bets on X and TRN stocks.

The 20 stocks listed in the table below have attracted the highest total mid-cap options volume during the past 10 trading days. Data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White.

Short Sellers Could Be Buying Option Hedges on U.S. Steel

An analyst at Longbow Research today slashed fourth-quarter and 2018 earnings-per-share estimates for several steel companies, citing demand weakness. However, U.S. steel stock is currently up 2.5% to trade at $26.30, and has rallied nearly 42% since its May lows around $18.50. Still, the shares' upside momentum has been capped by their 50-week moving average, as well as the $28-$30 region -- where X stock was trading before an earnings-induced bear gap in April.

Short sellers have been flocking to X stock. Short interest grew by 5% during the last reporting period, to 31.49 million shares, nearly 19% of the steel giant's total available float.

However, options traders have shown a distinct preference for calls over puts in the past two weeks, with 227,812 of the former and 141,263 of the latter exchanged. Echoing that, the security's 10-day call/put volume on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands at 2.17 -- higher than 70% of all other readings during the past year.

The out-of-the-money (OOTM) October 28 call has seen the biggest increase to open interest during this time frame, with more than 5,200 contracts added. As such, those buying the OOTM calls to open could be short sellers seeking an options hedge.

The good news for options traders, regardless of the stock's direction: X sports a Schaeffer's Volatility Index (SVI) of 37%, which ranks in the lowest percentile of all other readings from the past year, implying that near-term options traders are pricing in relatively low volatility expectations. Furthermore, the equity hasn't disappointed premium buyers during the past year either, as evidenced by its Schaeffer's Volatility Scorecard (SVS) of 87-- which indicates X has consistently exceeded the options market's volatility expectations.

Trinity Industries Options Buyer Cashes In

Trinity Industries scored a big win today, when the fifth circuit court of appeals reversed a 2015 ruling, stating the company did not commit fraud. Trinity Industries now does not have to pay the $663 million judgment that was initially rewarded. As a result, the stock is up 11% to trade at $35.61 -- and just off a new two-year high of $35.97 -- and is among the best on the New York Stock Exchange (NYSE) today. TRN stock has tacked on 47% year-over-year, and has more than doubled since its February 2016 lows.

What's more, upgrades could be in store for Trinity shares. Half of the brokerages covering TRN stock rate it a tepid "hold," which means continued technical success could have analysts re-evaluating their bearish outlooks. A round of upbeat analyst attention could lure more buyers to TRN.

A short squeeze could also provide tailwinds for TRN. Short interest is at its highest point since May 15, and it would take more than nine days for the shorts to fully cover their positions, at the equity's average pace of trading.

TRN options traders have preferred calls over puts in the past two weeks, with 17,066 calls exchanged to 6,876 puts. A significant amount of this recent call volume has centered on the now in-the-money April 32 call, which is also home to peak open interest of 20,813 contracts. According to Trade-Alert, much of the volume is attributable to one well-timed roll-up of a bullish position last week.

The buyer purchasing the calls expected TRN to break out above $32 by April options expiration -- a feat accomplished today. At the time of the roll, on Sept. 28, the April 32 calls were bought for $2.30 apiece. Today, in fact, TRN calls are trading at seven times the average intraday pace, with more than 16,000 contracts exchanged -- mostly at the April 32 call. Trade-Alert indicates last week's speculator likely sold the calls for $4.95 apiece -- more than double what they paid.

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