Cleveland-Cliffs faces heightened options volatility ahead of earnings

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Cliffs earnings options volatility

Highlights

Cleveland-Cliffs options imply substantial short-term volatility ahead of earnings, driven by last quarter's 16% one-day move versus an 8% historical average.
Short interest near 14% intensifies potential for sharp price swings, compounded by CEO Lourenco Goncalves's combative stance towards short sellers.
Traders execute a strangle-swap at a $0.24 net debit to profit from post-earnings volatility decline, with maximum per-contract risk capped at $1.24.

Options pricing reflects earnings-driven risk

As reported by CNBC, options markets are pricing in significant near-term turbulence for Cleveland-Cliffs as the steel producer approaches its earnings release. The concern follows a nearly 16% one-day jump after the company’s July quarterly report, well above its longer-term historical average move of slightly more than 8%.

Short interest stands near 14%, adding to the potential for abrupt price action if results or management commentary force traders to reposition. The article also notes that Chief Executive Officer Lourenco Goncalves is known for combative remarks toward short sellers, a factor that reinforces expectations of heightened volatility around the event.

For traders seeking to sell premium without taking unlimited exposure, the setup highlighted is a strangle-swap, also referred to as a double-diagonal spread. The structure involves selling a shorter-dated strangle and buying a longer-dated strangle, aiming to benefit from the expected decline in implied volatility after earnings, commonly called vol crush.

Defined-risk strategy targets post-report volatility decline

The trade described consists of selling a November 11 put at $0.43 and a November 17 call at $0.25, while buying a January 10 put for $0.49 and a January 18 call for $0.43. That leaves a total net debit of $0.24, or $24 per spread, based on standard option contracts covering 100 shares.

The strategy works best if Cleveland-Cliffs shares remain between $11 and $17 after the earnings release. In that range, the November short strangle is expected to lose value quickly as event-driven uncertainty fades, allowing traders either to repurchase the short options at a lower cost or let them expire worthless, while keeping the longer-dated January position.

The main risk emerges if the stock repeats or exceeds the kind of sharp directional move seen after the July report. Because the short strikes are narrower than the long strikes, a large move can cause the intrinsic value of the short options to rise faster than the longer-dated options offset those losses in the near term.

Even so, the longer-dated January options cap the worst-case outcome. The maximum downside risk is calculated at $1.24 per contract, combining the $1 width of the put spread with the $0.24 net debit, while the maximum upside risk is also $1.24 per contract based on the call spread width and the same debit.

Our earlier report on UBS’s earnings-season screen outlined how the bank sifted through more than 700 liquid U.S. stocks and flagged 40 names it expects to beat Wall Street estimates. We noted that the list includes companies such as SharkNinja, Gen Digital, and Labcorp Holdings, where UBS sees a setup for positive surprises that could influence share performance around upcoming results.

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