$X put buyers make a killing

U.S. Steel has dropped with analyst downgrades, handing large gains to bearish option traders.

On March 27, Investitute’s proprietary programs flagged the purchase of 5,000 May $19 puts for $1.31 to $1.38 with shares at $19.15. Volume was well above the strike’s previous open interest of 2,787 contracts, showing that this was fresh buying.

Those puts traded up to $2.69 today, twice their purchase prices. The stock fell 13% in the same time period, illustrating how options can far outperform moves in their underlying shares on a relative basis.

Long puts lock in the price where a stock can be sold no matter how far it might drop, gaining value in a selloff with the potential for significant leverage. The contracts can be purchased either as an outright bearish bet or a hedge on a long-stock position.

X was down 3.25% to $16.69 today. BofA/Merrill Lynch downgraded the steel maker by two notches to “sell” from “buy” this morning and slashed its price target to $18 from $31. That followed a downgrade by Credit Suisse to “underperform” from “neutral” on April 9 with a target reduction to $13 from $21.