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Transocean LTD (RIG) Spread Strategist Targets a 10-Year Low

Transocean LTD's January 2015 puts were used to initiate a two-legged bear spread

by 8/21/2014 2:55 PM
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Transocean LTD (NYSE:RIG) has been trending lower for some time now, off nearly 31% from its mid-November annual high of $55.74. In today's session, the stock is extending this decline, down 0.5% at $38.54, prompting one bearish option trader to bet on a longer-term slide to levels not seen in almost 10 years.

Shortly after the open, one block of 5,000 January 2015 30-strike puts was sold for $0.27 apiece, while a symmetrical block of 5,000 January 2015 35-strike puts was simultaneously bought for $1.27 each. Volume exceeds open interest at each strike, making it safe to assume a long put spread was initiated for a net debit of $1.00 per pair of contracts.

By initiating this two-legged strategy, the speculator has set a downside target in mind; specifically, the round-number $30 mark -- an area not seen by RIG since August 2004. In the best-case scenario, RIG will settle squarely at this spot at January 2015 options expiration, allowing the trader to pocket the maximum potential reward of $4.00 (difference between the two strikes less the net debit) on the purchased puts, while the sold puts can be left to expire worthless. However, she will still be able to profit if RIG breaches the breakeven mark of $34.00, which is calculated by subtracting the net debit from the bought strike. On the other hand, the most the speculator stands to lose is the initial net debit, should RIG settle north of $35 at options expiration.

Today's bearish positioning only highlights the withstanding trend witnessed in Transocean LTD's (NYSE:RIG) options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 50-day put/call volume ratio of 1.20 ranks in the 98th percentile of its annual range. In other words, puts have been bought to open over calls at a faster clip just 2% of the time within the past year.


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