Unusual Call Option Volume in US Steel: Potential Upside Ahead?

Key Points

• After a few takeover rejects from Japanese steelmaker Nippon Steel, United States Steel stock looks ripe for investors to bet on the domestic economy.
• There are expansion readings coming from the metals industry, according to recent data, leading the company in the right direction.
• Institutional buyers like the stock and bearish traders have reduced their short position size to show for it.

There is a lot of uncertainty around this year's potential new tariffs in the basic materials sector, particularly in the steel industry. With uncertainty comes a lot of shaky price action, better known as volatility, and many investors might feel confused as to what could happen next or what stock they could even look into in the next couple of months.

Well, today the answer is found in shares of United States Steel Co. NYSE: X despite its recent clash with the Biden administration as it blocked several takeover attempts from Japanese steelmaker Nippon Steel Co. OTCMKTS: NISTF. Some investors might have seen this as a potentially bearish development for United States Steel, others will recognize that the timing of the transaction wasn't at all in favor of the seller, leaving investors with plenty of upside.

Now that the stock trades at a decent discount from its highs, and given the fundamental developments in the steel industry and manufacturing stocks overall, investors will be able to justify the reasons behind recent institutional buying and potential double-digit upside in this company. The story is so clear that call option buyers decided to flock into the stock, betting on a rally in the not-so-distant future.

Why United States Steel?

If price action can be used to indicate a potential discount, then today’s levels for United States Steel stock might just do. According to Wall Street's definition of a bear market, the stock now trades at 74% of its 52-week high, officially in bearish territory (a 20% or more pullback from recent highs).

Then, there is the more traditional way to spot a discount, which is through valuation metrics. While the materials sector trades at an average price-to-book (P/B) ratio of 3.7x today, United States Steel stock has fallen to a steep discount of only 0.7x, both a discount to its own book value and a discount to most peers today.

But it doesn’t stop there; a price-to-earnings (P/E) ratio of 23.5x would fall way below the industry’s average 109.8x valuation, giving investors the opening they need to close down on this gap. However, there must be a reason (a catalyst) for the stock to move and prove these call option buyers right.

Industry Expansion Is Underway

While the manufacturing PMI has contracted for 26 consecutive months, there are some changes happening right now that could flip this past record on its head. For the month of December, the sector reported a sudden surge in new orders, meaning that industries are preparing for domestic and foreign demand.

But not all industries are the same, as the primary metals industry specifically commented, “There is definitely an uptick this month…” inside the PMI report. Considering that the new administration is focusing on domestic production, and Goldman Sachs analysts have warned about a lower dollar in their 2025 macro outlook report, the stage is set.

Set for United States Steel to take on a significant volume of this export and production share, which is why up to 111,124 call options were bought as of late December 2024, a massive increase of 67% from the typical daily average volume of 66,520 contracts traded.

This could be a signal that underlying views for traders and investors have shifted to the bullish end of the gauge. Now the thesis can be tied to the expanding dynamics in the manufacturing sector with the steel industry in mind specifically.

The Market’s Take on United States Steel Stock

That would also explain some of the other recent activity around the stock, such as the institutional buying spree that those at Polianta decided to start in January 2025. These buyers boosted their holdings in United States Steel stock by 26.4%, bringing their net position to a high of $1.3 million today.

On the opposite end of the market, investors can check with the bearish traders and see how they’ve treated United States Steel stock lately. A decline of up to 3.3% over the past month would be a sign of bearish capitulation in the face of all these bullish developments in the stock and industry.

So, the takeover bid reject actually turned out to be a blessing in disguise for investors, since now the company has a chance to not only recover its 52-week high but also attempt to make new highs in 2025, with all of the tailwinds behind it to back it up.