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Transocean LTD (RIG) Traders Brace for a Steeper Pullback

One speculator bought to open a block of RIG's August 55 puts today

by 2/22/2013 2:12 PM
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A modest pullback in today's session has option bears circling around Transocean LTD (NYSE:RIG - 52.76). Around 6,150 puts have crossed the tape so far, representing an 87% mark-up to RIG's average intraday put volume. One speculator is making bets on additional downside over the next seven months, and bought 2,400 August 55 puts near the ask price at $5.80. At last check, implied volatility was higher, suggesting these puts were bought to open.

By initiating these bearish bets, the speculator is assuming RIG will fall below $49.20 (strike minus net debit) by August expiration. This breakeven mark represents a 6.7% slide from current levels. As of Thursday's close, delta for these puts was listed at negative 0.57, or 57%. In other words, the options market is giving the positions a nearly 3-in-5 chance of finishing in the money at expiration.

Today's penchant for puts represents a change of pace for option players, per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). During the course of the past 10 sessions, speculators have bought to open 409 calls for every 100 puts. This call/put volume ratio of 4.09 ranks higher than 65% of other such readings taken in the past year, indicating bullish bets have been placed over bearish at a faster-than-usual clip in recent weeks.

Echoing this call-skewed trend is the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.54. 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 in the lowest percentile of its annual range. Simply put, short-term speculators are more call-heavy now than at any other time within the last year.

Technically, RIG has been a solid performer in 2013. In addition to the shares gaining around 18% year-to-date, they have outpaced the broader S&P 500 Index (SPX) by roughly 12 percentage points over the past two months. However, after hitting a new annual high of $59.50 on Feb. 14, the equity pulled back to its 50-day moving average, and is now trading just north of this rising trendline.

Fundamentally, the offshore drilling contractor will be heading to a U.S. District Court in New Orleans on Monday to begin deliberations over its involvement in the 2010 Deepwater Horizon oil spill.


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