Playing a Bearish Iron Ore Market With Mining Options

Posted by Andrew Wilkinson via Resource Investor

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If you are interested in taking a little risk in your portfolio, seasoned trader Andrew Wilkinson lays out a few opportunities in this bear market opportunity – Money Talks

iStock 000013137293XSmall-resize-380x300-1Playing a bearish iron ore market with mining options

According to The Steel Index, the sliding price of iron ore has delivered a bear market — technically speaking, with its price sliding 8.3% to commence the week. A decline of 20% from a recent peak is good enough to match the criteria for a bear market and the poor weekend trade report from China has given rise to growing concerns that the economy is grinding to a halt. Lower iron ore prices have the potential to translate badly for related company earnings. And as US stocks slip on Monday, option traders are populating several related companies. 

Shares in AK Steel Holding Corp. (Ticker: AKS) have suffered least and are down by 1.4% to $6.23. Options implied volatility is higher by 9% to 62.9%. However, this name has the highest put-to-call ratio on the day with almost 16 bearish puts in action for every bullish call. Almost half of the entire day’s 23,400 options contracts were earlier traded across put options expiring in June at the $6.00 strike. The 10,300 contracts traded at the strike compares to open interest of only 1,180 contracts.

The largest price decline amongst this group belongs to Walter Energy Inc. (Ticker: WLT) whose shares slid by 8.7% to $9.53. Options implied volatility jumped 11% to 86.9% while options trading ran-up to 34,000 contracts. There are only 347,000 open contracts on the entire stock.

The name with the largest volume of open interest is Vale SA (Ticker: VALE) where volatility jumped 7.3% to 36.9%. Its shares slid by 3.4% to $12.62 as option trading registered an early afternoon tally of 30,200. The put-to-call ratio of 0.86 indicates close symmetry in the overall pattern of trading. This week’s call options expiring Friday at the 13.5 strike were sold down to 3-cents, while on the bear side the March 28 expiration $12.5 puts were most actively traded. Also popular amongst traders Monday are the $17.0 strike calls for June expiration where 5,000 contracts have traded at around 7-cents per contract.

Both Freeport McMoRan (Ticker: FCX), whose share price is down 3.3% to $31.14, and United States Steel Corp. (Ticker: X), where shares are lower by 2.4% to $24.24 have experienced a double-digit increase in options implied volatility as well as strong trading interest. Freeport volume of 43,000 compares to established positions totaling 755,000 while US Steel has comparable metrics with 22,000 options in action where the open interest tally is 466,000 contracts.


ABOUT THE AUTHOR Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.