X - US Steel - Company Profile

United States Steel Corporation produces and sells flat-rolled and tubular steel products in North America and Europe. It operates through three segments: Flat-Rolled Products (Flat-Rolled), U. S. Steel Europe (USSE), and Tubular Products (Tubular). The Flat-Rolled segment offers slabs, rounds, strip mill plates, sheets, and tin mill products. This segment serves customers in the automotive, consumer and the combined industrial, service center, and mining commercial markets. The USSE segment provides slabs, sheets, strip mill plates, tin mill products, and spiral welded pipes, as well as heating radiators and refractory ceramic materials. This segment serves customers in the construction, service center, conversion, container, transportation, appliance and electrical, oil, gas, and petrochemical markets. The Tubular segment offers seamless and electric resistance welded steel casing and tubing; and standard and line pipe and mechanical tubing products primarily to customers in the oil, gas, and petrochemical markets.

US Steel is not a company I would normally recommend. The steel business is cyclical and China routinely dumps low priced steel in the USA. With the global economy operating at crawl speed it is not likely that steel demand is going to surge soon.

However, something is happening at this 115-year-old steel company. Somebody may be preparing to make a play to acquire the company. The Canadian counterpart, U.S. Steel Canada, which is in bankruptcy, received several acquisition offers. U.S. Steel Canada was formerly a unit of U.S. Steel. Reportedly, bids were higher than expected. Several were from U.S. companies. Two U.S. hedge funds, Bedrock Industries and KPS Capital Partners were among the bidders.

On Friday someone bet close to $1 million that U.S. Steel would be over $24 by January. That is an enormous bet if you did not have some inside information OR that bet was made by somebody planning on taking a run at buying the company. They bought more than 12,000 January $24 calls for prices between 75 cents and $1. The open interest was only 1,157 at the time and the stock was trading for $17.50. Buying six-month calls that are 33% out of the money is suicide unless you have inside information.

I am recommending we piggy back on their trade but in a slightly different manner. Rather than paying $1.34 for a call that is $6 OTM, I am recommending we buy the $20 call for $2.56 and sell the $14 put for $1.53 for a net debit of $1.03. We will be profitable over $21 where the mystery buyer needs X shares to move over $25 to be profitable. This way if the news does not move the stock as much as they expect we will still be in good shape.

This is purely a speculative trade based on that $1 million bet. If you cannot afford to lose $1 then do not enter this trade.

Buy Jan $20 call, currently $2.56, no stop loss
Sell Jan $14 put, currently $1.53, no stop loss.
Net debit $1.03.

RH - Restoration Hardware - Company Profile

Restoration Hardware Holdings, Inc., together with its subsidiaries, engages in the retail of home furnishings. It offers products in various categories, such as furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. The company sells products through its stores and catalogs, as well as through its Websites, such as restorationhardware.com, rh.com, rhbabyandchild.com, rhteen.com, and rhmodern.com. As of January 30, 2016, it operated 69 retail galleries that include 53 legacy galleries, 6 larger format design galleries, 4 next generation design galleries, 1 RH modern gallery, and 5 RH baby & child galleries, as well as 17 outlet stores throughout the United States and Canada.

RH surprised investors in early June when they reported an unexpected loss. Shares fell from $36 to $25 as investors panicked. The luxury retailer reported a loss of 5 cents compared to estimates for a 5-cent profit. The CEO said the company "was being pressured by the continued retail headwinds in a market impacted by energy, currencies and a general slowdown in the luxury consumer market." In addition, "the costs associated with RH Modern production delays and investments to elevate the customer experience, the timing of recognizing membership revenues related to the transition from a promotional to a membership model, and more aggressive approach to rationalizing our SKU count to optimize inventory, are expected to impact fiscal 2016 earnings by $.90 to $1.00." However, he said all these factors are short term and performance will improve in Q4 and accelerate into 2017.

Earnings September 8th.

Last week the shares rallied 10% after a BB&T analyst said the company should sell itself or merge with Williams Sonoma (WSM). Several other analysts picked up the thread and agreed it would be a good move. While CEO Gary Friedman may not be ready to join forces, the weak luxury retail market may force him to consider the option. The constant talk could also provide an incentive to other potential acquirers to come knocking on his door. The RH business is a good business. They are evolving and they will be stronger in 2017.

I was looking at RH as a potential play before the WSM comments appeared. Shares had sold off significantly from their $106 high back in November. When it appeared they had found a bottom at $25 I was willing to take a shot. The WSM news spiked the option premiums but it also reminded a lot of investors that RH was at an attractive level. They could easily be back at $40-$45 by January.

Buy Jan $35 call, currently $2.90, no initial stop loss.

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