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This column was originally published on RealMoney on Sept. 25 at 2:27 p.m. EDT. It's being republished as a bonus for readers. Click here for a free trial to RealMoney .

Shares of steelmakers, such as

U.S. Steel

(X) - Get United States Steel Corporation Report



(NUE) - Get Nucor Corporation Report

, are bending under the pressure of an analyst downgrade from UBS this morning. They're now in danger of a major breakdown.

Both stocks and many lesser names like

Olympic Steel

(ZEUS) - Get Olympic Steel, Inc. Report

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have all moved below their 200-day moving averages and won't find significant support levels for another 10% to 15% lower on their charts.

But only U.S. Steel is seeing anyone take notable action in the option markets. Its October $55 puts and January $50 puts have traded 44,000 and 37,000 contracts, respectively. In each case, this surpasses the strike's prior open interest.

You could argue that, if this was done as a diagonal calendar spread, it's a basically bearish bet no matter which way it was established. If someone sold it -- that is, bought the October $55 and sold the January $50, even though it was done for a credit of around 50 cents -- the purchase of the higher strike would mean the position could reap a profit if U.S. Steel moves sharply lower, as in below $50, in the next few weeks.

If the position was established by selling the October and buying the January for the 50-cent debit, the profitable scenario would be for shares to stabilize here around $55 for the next few weeks, and then resume their downtrend heading into 2007. The long January puts would then have a reduced effective cost basis and be positioned to profit from decline in prices.

Or, the trades could be unrelated or connected to some other position entirely. This is a good example of the difficulty of determining what specific trades might mean and the danger of trying to read into daily volume. But it also highlights how timeframes and market are very important in choosing the right strategy. In this case, both sides of the same trade could be potential winners if the price action follows a script of a big dip, a rebound and a slide toward new lows. I hope it works out for all and everyone ends up happy.

Steven Smith writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback;

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