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Acquisition News Attracts Put Players to Hercules Offshore

Traders set their sights on HERO's front-month puts

by 3/21/2012 12:24 PM
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Hercules Offshore, Inc. (HERO - 5.53) announced last night that it will acquire the Ocean Columbia rig from sector peer Diamond Offshore Drilling (DO) for $40 million in cash -- which may have prompted FBR Capital Markets to raise HERO to "market perform" from "underperform." Even so, put players seem to be unfazed by the news, as 1,742 of these options have been traded so far -- which is a whopping 33 times the norm. The bulk of the action has centered around the in-the-money April 7 strike, where 1,600 puts have changed hands. This option is currently home to open interest of just 40 contracts, pointing to a fresh batch of new positions.

This surge in put volume runs counter to HERO's current trend. The drilling issue sports a 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 31.44, confirming that calls bought to open have outnumbered puts by more than 31 to one during the last two weeks. This ratio registers in the 75th percentile of its annual range, which means that investors have been buying bullish options over bearish at a faster-than-usual pace.

Meanwhile, short interest on HERO rose by 8.21% during the most recent reporting period, and now accounts for a healthy 7.54% of the equity's float. This could indicate that short sellers looking to hedge their bearish bets could be responsible for some of the aforementioned buy-to-open call volume.

In terms of technical performance, HERO has added over 22% year-to-date, and has bested the broader S&P 500 Index (SPX) by more than 6% during the past 20 sessions. On the charts, the stock is testing resistance at $5.50, which has served as a ceiling since last June.

At midday, HERO is ahead by about 8.8% to wink at the $5.53 level.


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