Cleveland-Cliffs, a major player in the steel industry, is preparing for its earnings report, which has led to heightened activity in options trading. Following a notable 16% price increase after its last quarterly report, traders are concerned about potential volatility, as indicated by a short interest of nearly 14%.
The company's CEO has a reputation for confronting skeptics, which adds to the uncertainty surrounding the stock. In response, traders are employing a 'strangle-swap' strategy to manage risk while capitalizing on the anticipated decline in implied volatility post-earnings.
This involves selling shorter-dated options while buying longer-dated ones, allowing traders to benefit from the expected 'vol crush' after the earnings announcement. The strategy is designed to be profitable if Cleveland-Cliffs' stock remains within a specific price range of $11 to $17 after the report.
However, there is a risk of losses if the stock experiences significant price movements, as the short options could gain intrinsic value faster than the long options can compensate. Overall, this situation highlights the complexities of trading around earnings reports and the strategies investors might use to navigate potential volatility