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2 Great Income Opportunities From Friday’s Unusual Options Activity

Barchart - Fri Dec 15, 2023

As I write this midday Friday, the second last Friday before Christmas, we all could use a little extra money to buy presents to put under the tree on Dec. 25. 

If all holds, the Dow Jones Industrial Average will finish up for the week, the seventh consecutive week in positive territory. The S&P 500 will also likely deliver a seventh week in positive territory. 

At this point, I doubt too many investors want the page to turn on the calendar, killing the momentum the markets have been riding since Halloween.

If you’re an income investor, I’ve got two put options for income to consider before you break for the holidays. They all have volume-to-open-interest (Vol/OI) ratios above 10, suggesting they are unusually active today. 

Have an excellent weekend.

U.S. Steel

The U.S. Steel (X) Dec. 22 38.50 put currently has a Vol/OI ratio of 11.52. Its bid price is $0.42. Based on its $39.36 share price, its annualized yield, at 57%, is attractive. Out of the money by 86 cents, the current speculation about multiple $40+ bids for the Pittsburgh-based steel manufacturer suggests you won’t have to buy the shares in seven days. 

Barron’s reported on Wednesday that a U.S. Steel jet was seen in Nucor’s (NUE) hometown of Charlotte, North Carolina. Nucor is a much larger and, arguably, far more successful American steelmaker.   

The pursuit of a sale by U.S. Steel started in earnest in August when the company announced it was looking at strategic alternatives, often considered code words for selling the business.

“We’re actually most interested to know where Nucor stands in all this and that goes double because U.S. Steel was briefly in Charlotte yesterday before it flew on to NYC,” Barron’s reported comments from Gordon Haskett analyst Don Bilson. “Nucor, of course, is based in Charlotte, and outside of a flight on Oct. 2022, our jet tracker hasn’t seen U.S. Steel in Charlotte in years.”

It reminds me of the Blue Jays fans watching Flight Tracker while waiting to see who would sign Shohei Ohtani. Blue Jays fans know how that ended. Not well.

The flip side of any Nucor bid would be that it’s a non-union shop, and U.S. Steel is the epitome of union representation. 

Nonetheless, there are supposed to be several bids out there over $40, so even if you did have to buy the shares at $38.08 (net), you’d probably make money on the trade.

In mid-August, I suggested options buyers sell Aug. 25 $28.50 puts for a surefire 20% annualized yield as part of an ongoing M&A arbitrage play. You might have to go a little higher now.

B. Riley Financial

B. Riley Financial (RILY) is a Los Angeles-based small-cap investment bank. In addition to providing investment banking services, it invests in other businesses on behalf of other investors and with its own capital. 

One of the companies it's invested in is the Franchise Group, which was taken private in September for $2.6 billion. B. Riley sunk $217 million into the management-led buyout of the former public company. Franchise Group owns several franchises, including The Vitamin Shoppe and Pet Supplies Plus. 

The CEO of Franchise Group, Brian Kahn, is rumored to be associated with someone who pled guilty in a $294 million fraud case. Kahn has denied any wrongdoing. RILY shares fell on the news in mid-November. They’re down more than 50% since.

As Clint Eastwood’s Dirty Harry’s character would say, “Do you feel lucky, punk? Well, do ya? They separate the professionals from the amateurs by making a bet like this.  

B.Riley CEO Bryan Riley is adamant he bet on the right horse.

“We would have bought all of Franchise Group. We are a huge fan of that business,” The Motley Fool reported Riley’s comments on Nov. 13. “I want to just be clear. I believe we are going to make a lot of money for our shareholders and Franchise Group.”    

So, the Dec. 29 $15 put currently has a $1.25 bid for an annualized yield of 162% based on its $20.24 share price. Out of the money by more than $5, this is a dream bet for an aggressive investor interested in a little income before the end of the year.

As an aside, the company announced on Nov. 29 that it had launched a U.S.-based Executive Search practice to be based in Los Angeles and headed up by Ian Brenner, who’s in charge of the firm's Executive Search & Interim Management practice. 

Interestingly, this practice began in the Canadian market where I’m from. U.S. companies often dip their toes into new businesses by operating off-the-radar north of the border. It gives them time to work out the kinks before entering the big leagues. 

It’s a smart move.    



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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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