Why Transocean Stock Could Pop After Earnings

RIG tends to rally the day after its quarterly earnings reports

Feb 16, 2018 at 11:13 AM
facebook X logo linkedin

Offshore drilling contractor Transocean Ltd. (NYSE:RIG) is slated to report fourth-quarter earnings after the market closes next Tuesday, Feb. 20, with consensus estimates calling for a loss of 27 cents per share. RIG has managed to trade higher the day after earnings following six of its last eight quarterly reports -- but ahead of next week's reports, traders on Wall Street appear to be bracing for a big disappointment.

For starters, short interest on RIG rose by 6.5% in the latest reporting period to total 87.2 million shares -- just a stone's throw from an annual high. Short interest now accounts for a hefty 22.3% of the equity's float, or 6.6 times Transocean's average daily trading volume. That's a pretty formidable supply of bearish bets.

Likewise, speculative players have shown a stronger-than-usual interest in put options on RIG ahead of earnings. During the past 10 sessions, traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) bought to open 12,715 puts on RIG, compared to 12,686 calls. The resulting 10-day put/call volume ratio of 1.00 registers in the 99th percentile of its annual range, which means options buyers have rarely shown a more pronounced preference for bearish bets over bullish.

Analysts are also crowded into the bearish camp. Among the 19 brokerage firms tracking Transocean shares, 13 call the stock a "hold" or "strong sell." And earlier this week, Evercore ISI -- one of the few firms with an upbeat "outperform" rating on the equity -- cut its price target to $20 from $21.

In light of RIG's long-term underperformance on the charts, this widespread negativity isn't exactly shocking. At its current perch of $9.17, RIG is down nearly 38% from its year-end 2016 levels, and the shares recently tumbled through tentative support at their 40-day, 80-day, and 160-day moving averages.

That said, the oil-and-gas issue appears to be testing a possible floor around the $9 level, which previously acted as resistance during the second half of 2017. And the stock's 14-day Relative Strength Index (RSI) has been hovering in the low 30s for well over a week now.

rig daily price chart feb 2018

With plenty of pessimism priced into RIG from all corners, and the recently oversold stock testing support on the charts, the stage would appear to be set for a post-earnings bounce (though most likely of the "dead cat" variety) in the event of some stronger-than-expected numbers next Tuesday evening.

However, prospective short-term premium buyers should proceed with caution. Currently, the options market is pricing in a post-event price swing of 5.1% for RIG, compared to its average daily post-earnings move of 3.9% over the past eight quarters, according to Trade-Alert. In fact, 30-day at-the-money implied volatility on RIG options currently stand at 50.7%, in the 87th annual percentile -- suggesting short-term contracts have priced in higher volatility expectations only 13% of the time, and effectively raising the risk of a post-event volatility crush.


Target Effortless Triple-Digit Gains Every Sunday Evening For Life!

This is your chance to triple your profit potential on Sunday evenings, without spending all your free time watching the market.

On Sundays, as a Weekend Plus subscriber, you’ll get up to 6 trades every Sunday, each targeting gains of 200% or more.

Start targeting gains like the ones our subscribers have seen recently, including:

213.3% GAIN on AutoNation calls
100.0% GAIN on Monster Beverage calls
100.4% GAIN on Walgreens Boots Alliance puts
100.4% GAIN on ON Semiconductor calls
257.7% GAIN on Dell calls

101.0% GAIN on Apollo Global Management calls
103.6% GAIN on JP Morgan  Chase calls
105.3% GAIN on DraftKings calls
101.3% GAIN on Airbnb calls
203.0% GAIN on Shopify calls
102.0% GAIN on Cboe Global Markets calls
100.9% GAIN on Boeing calls
102.1% GAIN on Microsoft puts
102.3% GAIN on First Solar calls
101.5% GAIN on PulteGroup calls
101.0% GAIN on Apple calls
209.4% GAIN on NXP Semiconductors calls
100.8% GAIN on Uber Technologies calls
100.4% GAIN on Academy Sports and Outdoors puts
102.2% GAIN on Trade Desk calls
100.8% GAIN on DoorDash calls
100.0% GAIN on Camping World Holdings puts
100.0% GAIN on Cboe Global Markets calls
100.2% GAIN on C3.ai calls
238.5% GAIN on Oracle calls



Rainmaker Ads CGI