US Steel Braces for Battle

$CLF gets rejected with its first offer for $X

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I’ve lowered the pay wall today to include the “Identify” section, where we talk about what’s going on with the US Steel takeover.

Thanks as always for reading.

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Setting the Table:

• Equity futures are nudging positive this morning despite a choppy week last week and continued clouds on the horizon in China with one of their largest developers continuing to struggle with debt payments. We’ve heard from the tech giants, but this week retail is in focus for earnings with Home Depot ($HD), Target ($TGT), and Walmart ($WMT) all in line to report.

• Options trading volume was healthy (44M)  for a summer Friday that was off the typical expiration cycle. The short term trend has been volatility bouncing off some of the early summer lows. While realized volatility still continues to be lower than implied, the tick up has slowly driven the OWL index lower. This measures both rate and volatility expectations by calculating the number of deltas a zero coupon T-Bill buys - here at 360 days. As rate expectations have steadied and vol ticks up, this capital secure position offers less upside (reading 61, down from a high of 66).

  

• US Steel ($X) rejected a takeover offer from Cleveland Cliffs ($CLF) over the weekend in a sign that big time takeovers are still around. US Steel will now be officially exploring alternatives after rejecting a private bid from CLF 0.00%↑ , who made their cash and stock proposal public on Sunday. More on that below…

• Parting thought - if US Steel gets taken over, who gets first dibs on the “X” ticker?

Identify:

• The US Steel takeover proposal is something that will drive significant options volume as investors try to position around the deal probability. CLF is willing to pay a healthy premium to Friday’s close price of $22.72 with a combined offer of $32.53.

  • N.B. the actual deal price will be in constant flux. $CLF has pledged only $17.50 in cash and 1.023 of its shares.

• Stock is trading around $28.20 currently. A simple way to think about this is that the market is pricing about a 60% chance this gets done at that level - the amount stock has moved towards the effective price from its previous close. When takeovers happen, there are other bidders that could come in, or the deal could trade higher. 

• This news all came out over the weekend, so with options markets not yet open for business, we are still looking at pre-news structures this morning. Volume on Friday was healthy, but nothing particularly out of the ordinary. 

• I’m always interested in order flow before a deal gets announced, and Friday’s top volume didn’t look particularly suspicious to me. Overall volume and open interest were in line with trends for X 0.00%↑ .

  

• There were a few active lines on Friday, but even here the flow went both directions. For the biggest trades, buying 4000 upside calls in September when the average line only trades a few hundred seems suspicious, but 6000 downside puts also traded in January.

  •  It’s impossible to know which way anyone is going or what their entire position looks like (e.g. put buyers could be doing a married put against a large stock block also purchased) but this orderflow pre-deal looks relatively benign. 

  • Another interesting thing to consider is that X is a popular stock for investors to write covered calls. The fairly high implied volatility and nature of their business makes this attractive, so those contracts could just as easily have been initiated by a seller.