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Transocean Shareholders Play the Stock's Consolidation

RIG's out-of-the-money November 42.50-strike put was popular on Wednesday

by 11/15/2012 10:59 AM
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Despite Transocean LTD's (NYSE:RIG - 44.85) 17.3% year-to-date advance, option players have been feverishly initiating long puts of late. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 148 puts for every 100 calls during the past 10 sessions. What's more, this put/call volume ratio of 1.48 ranks higher than all other readings taken in the last year, indicating puts have been bought to open over calls at an annual-high clip in recent weeks.

This trend toward puts has translated into an elevated Schaeffer's put/call open interest ratio (SOIR) for RIG. Specifically, the stock's SOIR of 0.98 ranks in the 90th percentile of its annual range, suggesting short-term speculators have been more put-heavy just 10% of the time within the past year.

Wednesday's option activity was no exception, with puts easily outstripping calls as the contracts of choice. Around 14,000 put contracts crossed the tape, representing over three times the average daily put volume, and more than double the number of call contracts traded. Near-term speculators turned their attention to the November 42.50-strike put, which expires at tomorrow's close. All of the 6,257 contracts traded crossed at the ask price, and open interest soared by more than 6,000 contracts overnight, making it safe to assume new positions were initiated here.

By buying these out-of-the-money puts to open for a volume-weighted average price of $0.05, traders will profit with each step below $42.45 (the strike minus the average premium paid) RIG takes over the next two days. This represents a 5.7% dip from the stock's current price.

As touched upon, RIG has had a respectable run up the charts in 2012. In fact, since hitting its year-to-date low of $39.32 on June 4, the stock has added a solid 14%. In light of this technical prowess, this recent uptick in put volume may simply be shareholders protecting their paper profits against a potential pullback. As it turns out, the equity brushed past its upper Bollinger Band on Nov. 6, suggesting RIG had entered overbought territory, and has since consolidated around the $44.50 mark.

This theory of protective put buying is supported by the sentiment surrounding RIG outside of the options pits. Among the brokerage bunch, no fewer than 18 out of 24 covering analysts believe the stock to be a "buy" or "strong buy," and the consensus 12-month price target of $60.37 represents a 36% premium to yesterday's closing price of $44.38. Plus, just 1.1% of the stock's float is currently sold short, suggesting Wall Street holds RIG in an optimistic light.

At last check, RIG was up roughly 1% in early trading to hover near $44.85.


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