Options Traders Place Fresh Bets On Spiraling Seadrill Ltd (SDRL) Stock

"Complex" restructuring talks drop Seadrill Ltd (NYSE:SDRL)

Jan 31, 2017 at 3:14 PM
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Shares of Seadrill Ltd (NYSE:SDRL) are trading down 28.4% at $1.90 -- on the short-sale restricted list -- after the offshore drilling operator said restructuring talks are proving to be "more complex than ... originally anticipated." Additionally, the company is looking to raise at least $1 billion in new capital. Against this backdrop, speculators are flooding SDRL's options pits, and with 54,081 contracts on the tape, volume is trading at four times the average intraday rate.

In a change of pace, calls are edging out puts, with 27,392 of the former and 26,752 of the latter exchanged so far. Two of the most active contracts are SDRL's January 2018 2- and 3.50-strike calls, where it looks as if new positions are being purchased. While the expectation of "vanilla" call buyers would be for SDRL to rally back above the strikes over the next 12 months, it's likely some of the activity at these out-of-the-money strikes is a result of short sellers hedging against any upside risk. In fact, SDRL is a heavily shorted stock, with 26% of its float dedicated to these bearish bets.

In fact, the withstanding trend in SDRL's options pits has been toward puts. Among all SDRL options, more than 526,000 puts are currently outstanding, compared to 273,908 calls. Narrowing the scope to focus on the front three-months' series of options just highlights this put-bias. Specifically, SDRL's Schaeffer's put/call open interest ratio (SOIR) of 2.36 ranks in the 98th percentile of its annual range. In other words, short-term options traders have rarely been as put-heavy toward the stock as they are now.

In the past two weeks, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 3.45 puts for every call. What's more, this ratio ranks just 7 percentage points from a 52-week peak, indicating puts have been bought to open over calls at a near-annual-high clip. Today, although calls have a rare lead over puts, short-term traders are purchasing new positions at SDRL's March 2 put -- bracing for additional losses for the energy stock over the next several weeks.

Looking at the charts, today's negative price action is nothing new for SDRL. Since topping out at a record peak north of $48 in September 2013, the shares have lost 96%. More recently, the stock's rally off its late-2016 double-bottom in the $1.85-$2.00 region was quickly rejected by SDRL's 80-week moving average -- a trendline that served as resistance in late 2013 and mid-2014.

SDRL weekly since july 2013

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