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December 30, 2016  Fri 8:02 AM CT

Materials have pulled back from their recent torrid rally, but traders are looking for Cliffs Natural Resources to resume its run higher.

Cliffs, which produces iron ore used to manufacture steel, soared along with other industrial-materials stocks after the presidential election on hopes of government-sponsored infrastructure programs under the Trump administration. Traders continued to bet on more gains through options, but many of these names have pulled back.

But yesterday our systems detected the sale of 9,480 April 13 calls for $0.31 below open interest of 14,461 contracts and the purchase of 10,000 April 10 calls for $0.84 against open interest of 7,109. The investor could either be rolling the April 13s to the lower strike, as their volume is below open interest, or opening a new vertical spread. Either trade is bullish.

Long calls lock in the price where investors can buy stock, allowing them to profit from a rally with limited capital at risk. Their cheap cost can also generate significant leverage on a percentage basis if shares move in the right direction.

If this is a vertical spread, the investor is looking for CLF to rally above $10 by expiration. The sale of the higher-strike contracts reduces the cost of the long calls but limits potential gains, as the trader will be obligated to sell shares if they rise above $13. (See our Education section)

CLF fell 3.57 percent to $8.65 yesterday but is up 42 percent in the last three months. The company reported bearish results on Oct. 27 and is expected to announce its next quarterly numbers before the market opens on Jan. 26.

Overall option volume in CLF was twice its daily average yesterday. Calls outnumbered puts by a bullish 6-to-1 ratio.

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