Is It Time to Buy Transocean LTD (RIG) Call Options?

Transocean LTD (RIG) is keeping its post-election rally alive, but the stock remains surrounded by skepticism

Dec 12, 2016 at 3:13 PM
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Oil stock Transocean LTD (NYSE:RIG) is higher yet again today, boosted by crude oil prices. The shares were last seen up 0.4% at $15.48 after notching a fresh annual high of $16.66 earlier in the session. RIG continues to be one of the top post-election performers on the S&P 500 Index (SPX), so far extending its gains since Election Day -- just over one month ago -- to more than 57%. Despite an outstanding run up the charts, RIG remains surrounded by a surprising amount of pessimism.

Beginning with the brokerage bunch, 18 analysts currently rate RIG a "hold" or a "strong sell," compared to just three "strong buy" recommendations. Plus, the average 12-month price target of $9.85 is seated in line with the stock's Nov. 8 close, and thus at a huge discount to current levels. That means RIG may be overdue for a round of upgrades and/or price-target hikes, which could boost the shares.

Short sellers have continued to pile onto the stock in recent weeks, despite the shares' continued climb, setting up a potential short-squeeze situation. During the two most recent reporting periods, these bearish bets grew by 5.5%, and now represent about 27% of RIG's available float. At the equity's average pace of trading, it would take at least six sessions to cover all the shorted shares -- plenty of buying power to give RIG a lift.

Turning to the options pits, bearish bets continue to be the norm, as well. Across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 1.10 sits higher than 70% of the past year's readings. At the same time, it's possible put buyers could be Transocean shareholders protecting paper profits.

No matter the case, this preference for puts is echoed among short-term traders, as well. In fact, RIG's Schaeffer's put/call open interest ratio (SOIR) of 1.82 rests in the high 91st percentile of its annual range. What's more, the stock's front-month, gamma-weighted SOIR sits at 2.48 -- indicating put open interest more than doubles call open interest among near-the-money options in the December series, which expires at the close this Friday.

Today RIG puts are changing hands at nearly double the expected intraday rate, with over 33,000 on the tape so far. It appears some bearish speculators may be buying to open the December 14 and 14.50 puts. Buyers of these puts are betting RIG shares will drop back below the respective strike prices before the end of the week. Meanwhile, the largest single trade involved a block of 10,000 January 2018 10-strike puts, which may have been bought to open as long-term protection, as Trade-Alert indicates the block is tied to 160,000 shares of RIG stock.

On either side of the tape, short-term options buyers could be getting a great deal on RIG. The security's 30-day at-the-money implied volatility of 50.2% and its Schaeffer's Volatility Index (SVI) of 48% are seated in the low 4th and 6th percentiles of their respective 12-month ranges. Simply stated, the stock's near-term options are pricing in historically low volatility expectations at the moment.

As alluded to, since Election Day, RIG stock has accomplished some impressive technical feats. After a bounce off the familiar $11 level, the shares flew into positive year-to-date territory for the first time since July -- and now sit on a 25% lead for 2016. What's more, Transocean LTD (NYSE:RIG) is on pace for a sixth consecutive daily win.

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