Schaeffer's Trading Floor Blog

Transocean LTD (RIG) Option Traders Forecast a Change of Direction

Speculators have been upping the bullish ante on RIG in recent weeks

by 3/11/2014 11:00 AM
Stocks quoted in this article:

Call players have been increasing their presence in Transocean LTD's (NYSE:RIG) options pits, per data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE). Specifically, speculators have bought to open 13,580 calls during the past five sessions, compared to just 204 puts.

Widening the scope to include data from the NASDAQ OMX PHLX (PHLX) -- and expanding the time frame to two weeks -- yields a similar backdrop. In fact, the stock's 10-day ISE/CBOE/PHLX call/put volume ratio of 10.94 ranks in the 98th percentile of its annual range, meaning calls have been bought to open over puts with more rapidity just 2% of the time within the past year.

Echoing this call-skewed trend is RIG's Schaeffer's put/call open interest ratio (SOIR) of 0.55. Not only does this show that call open interest nearly doubles put open interest among options expiring in three months or less, but it ranks lower than 94% of similar readings taken throughout the last 12 months. In other words, short-term speculators are much more call-biased than usual toward Transocean LTD.

In the front-month series, the stock's out-of-the-money (OOTM) March 45 strike has garnered its fair share of attention from buyers, and since Jan. 23, nearly 2,800 calls have been bought to open here. With short interest up 52.7% in the last two reporting periods -- now accounting for a healthy 8.8% of the equity's available float -- a portion of this activity could be at the hands of shorts picking up hedges against any near-term upside.

Regardless of the motive, now appears to be a prime time to scoop up RIG's front-month options at a discount, as evidenced by the stock's Schaeffer's Volatility Index (SVI) of 23%, which ranks in the 17th percentile of its annual range. Simply stated, premium on Transocean LTD's short-term options is reasonably priced, from a volatility perspective.

Among the brokerage bunch, meanwhile, sentiment is rather skeptical. Of the 22 covering analysts, 17 maintain a "hold" or worse recommendation on RIG, while the consensus 12-month price target of $45.77 stands at a slim 7.9% premium to current trading levels. This bearish bias was witnessed last Wednesday, when Bernstein cut its price target on the equity.

On the charts, Transocean LTD (NYSE:RIG) has been making its way steadily lower since hitting its most recent high of $55.74 in mid-November, with the shares off 24%. However, the equity has been flirting with its lower Bollinger Band since late February, suggesting RIG was churning near oversold territory. Not surprisingly, the stock is up 1.3% in today's session to trade at $42.40.


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