Up until recently, 2017 had not been kind to AK Steel Holding Corporation (NYSE:AKS) stock. It fell over 50% from the December highs. This was a sector-wide problem, not one specific to AKS stock.
There are many factors contributing to this volatility and I won’t pretend to be an expert on them; very few people are.
So today, I will go long AKS stock based on its price action rather than on an endorsement of sector health.
Fundamentally, its value from a price-earnings perspective is in line with its competition, so nothing is obviously bloated. Yet, expectations from the analysts are modest. Most of them have AK Steel as a “hold,” so the risk of surprise downgrades should be minimal.
Technically, AKS stock is at levels that have been pivotal since September 2008. So the recent rally looks like a technical breakout, but one that is likely to face some resistance soon. $7.50 has recently served as a failure point, so bulls will need to work hard and earn the rally beyond it.
Today’s trade is not one that will chase the pop. Instead I will sell downside risk to generate income. This way I can profit even if the rally fizzles. The trick is to find proven support levels that are likely to hold through the year. Otherwise I am ready to own the shares.
AKS Stock Options
The Bet:
Sell AKS Jan 2018 $5 naked put and collect 50 cents per contract to open. Statistically, this trade is just better than a coin flip, which makes it a speculative trade in my book. If price falls below my strike I would own the shares and accumulate losses below $4.50. This is more attractive to me than chasing rallies, especially since I have a 25% buffer.
Selling naked puts even on a low-price stock is dangerous and does not suit all investors. But I can accomplish the same goal by selling spreads instead.
The Alternate Bet: Sell the AKS Jan 2018 $5/$4.50 bull put spread where I have about the same chances of success, but with limited profits. I can, however, still yield 30%. In either setup, I simply need AKS stock to stay above $5 to completely win.
For those who want to also capture the upside move, they can buy a debit call spread for that.
The Juice (Optional): Buy the AKS Aug $6/$7 debit call spread for 50 cents per contract. If price rallies past my strike, I stand to double my money. But since my cost basis into the calls is offset by selling puts, any premium I recapture from closing the debit call spread would be pure profit as long as price stay above $5.
As I always say, investing is risky, even with options, so only risk what you are prepared to lose.
Learn how to generate income from options . Nicolas Chahine is the managing director of . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at and stocktwits at .
