Transocean LTD (RIG) Could Benefit from a Shift in Sentiment

Transocean LTD (NYSE:RIG) has been rising in step with crude oil prices, but there's plenty of skepticism levied toward the energy stock

Jan 4, 2017 at 12:20 PM
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Drilling stock Transocean LTD (NYSE:RIG) has been ripping higher with crude oil prices of late, with the shares boasting a three-month gain of more than 52% -- and, prior to today, had outpaced the broader S&P 500 Index (SPX) by more than 44 percentage points over this same time frame. What's more, the stock took a strong bounce off its rising 20-day moving average following a recent pullback from its Dec. 12 annual high at $16.66, last seen trading at $15.52. And while options traders have taken the bullish route of late, there's still plenty of skepticism levied toward the oil shares, which could translate into a fresh burst of buying power as the weaker bearish hands begin to capitulate to RIG's upward momentum.

RIG daily since september 2016

Short sellers, it seems, have already begun to throw in the towel on their losing bets, with short interest down nearly 35% in the most recent reporting period. However, these bearish bets still account for almost 18% of RIG's available float -- or more than three sessions' worth of pent-up buying demand, at the stock's average pace of trading. A continued round of short covering could help buoy the shares of RIG in the near term.

Analysts, meanwhile, have remained on the sidelines among RIG's rally. Of the 22 brokerages covering the shares, 18 maintain a "hold" or "strong sell." Plus, the average 12-month price target of $11.30 stands at a nearly 27% discount to the stock's current perch. This leaves the door wide open for upgrades and/or price-target hikes, which could create additional tailwinds for the outperformer.

Options traders, it seems, have started to display a growing appetite for long calls over puts in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), RIG's 10-day call/put volume ratio has jumped to 2.92 from 1.37 in the past two weeks. Plus, the most recent ratio ranks in the 71st annual percentile, meaning calls have been bought to open over puts at a faster-than-usual clip.

And with low volatility expectations currently priced into the equity's near-term options, it seems to be a prime time for premium buyers to drill down on Transocean LTD (NYSE:RIG). Specifically, the equity's 30-day at-the-money implied volatility of 47.8% ranks in the 5th percentile of its 12-month range, while RIG's Schaeffer's Volatility Index (SVI) of 46% is docked below 91% of all comparable readings taken in the past year.

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