Time to Buy Transocean Calls

RIG shares just notched a new annual high, and a recent options signal points to more upside

Jul 10, 2018 at 1:33 PM
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The shares of offshore drilling concern Transocean LTD (NYSE:RIG) just notched a fresh annual high of $14.34, briefly barreling through recent congestion around the $14 level, even as drilling workers strike in Norway. Further, RIG stock yesterday popped higher after Susquehanna upgraded it to "positive" from "neutral," and hiked its price target to $16 from $11 -- territory not charted since early 2017. Against this backdrop, Transocean just flashed a historically bullish options signal, suggesting it could be time to buy RIG calls.

RIG stock has essentially doubled from its mid-August low of $7.20. As alluded to above, the $14 level has acted as a speed bump in the stock's journey higher in 2018, containing upside momentum back in May. Further, the $14.50 area served as support for Transocean shares in early 2017, before the equity's plunge. At last check, RIG was up 2% to trade at $14.03.

RIG stock chart july 10

Even with the equity in rally mode, Transocean's short-term options are attractively priced. The stock's Schaeffer's Volatility Index (SVI) of 41% sits in the 16th percentile of its annual range, suggesting near-term options are pricing in relatively low volatility expectations right now.

Since 2008, there have been just two other times where RIG stock was within 2% of a 52-week high and had an SVI in the bottom 20% of its 12-month range. After both of those options signals, the shares were higher one month later, up an average of 12.18%, per data from Schaeffer's Senior Quantitative Analyst Rocky White. A similar pop from current levels would put RIG around $15.73.

What's more, there's plenty of room for additional analysts on the bullish bandwagon. Although Transocean stock has rallied more than 31% in 2018, only five analysts have doled out "buy" or better endorsements, compared to seven tepid "holds" and five "sell" or worse ratings. More upgrades like RIG received on Monday could bring additional buyers to the stock.

Likewise, a continued uptrend could shake loose some short sellers. Short interest represents nearly 19% of RIG's total available float, or more than a week's worth of pent-up buying demand, at the stock's average pace of trading. That's plenty of fuel for a short squeeze to add fuel to RIG's proverbial fire.



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