ArcelorMittal (NYSE: MT - option chain) shares have dropped sharply after the company announced it will cut steel production globally by 30% during the fourth quarter due to declining prices and sluggish growth. MT had previously announced a 15% production cut earlier this year. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on MT or another steel manufacturer.This morning, MT opened at $26.01. So far today the stock has hit a low of $25.73 and a high of $27.52. As of 12:25, MT is trading at $26.16, down $5.54 (17.5%). The chart for MT looks bearish.
For a bearish hedged play on this stock, I would consider a December bear-call credit spread above the $40 range.
A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverages nice returns. For this particular trade, we will make a 4.2% return in one and a half months as long as MT is below $40 at December expiration. MT would have to rise by more than 52% before we would start to lose money. Learn more about this type of trade here.
MT was above $40 in early October, but has fallen sharply since then and shown resistance around $38 over the past month.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in MT.
3Com shows little profit growth, stock sells off
Serious Money: Not cheating -- market waving the caution flag
Warren Buffett calls for a second stimulus package
