Options Industry Council FREE Three-Part Webinar Series: Part One Wednesday, March 7 at 7pm EST. CLICK HERE FOR INVITE AND TO REGISTER.
Transocean (RIG) may still be best known to the public as the provider of the rig that BP (BP) used to drill the Macondo well in the Gulf of Mexico, but the stock is certainly trading as though investors are looking forward rather than back. RIG is up 34% year-to-date, which puts it well ahead of similarly sized peers like Halliburton (HAL) (-0.6% YTD) and Baker Hughes (BHI) (-7%).
Investors with a positive outlook on RIG might look to options markets to maintain upside exposure while reducing their risk, using calls to replace stock positions. After a substantial rally, call options on most stocks will trade at lower implied volatilities, making the options relatively cheaper to own. Looking at the level of RIG implied volatility now, that's not the situation at this juncture: RIG options at a 60-day horizon are actually trading more expensively than options on BHI or HAL. They're also trading at a small premium to the recent historical volatility of the stock.
Let's take a look with Scott and Jill as they walk through the fundamentals and technicals of RIG.
The good news for traders is that a put vertical spread offers the same bullish exposure while providing a chance to profit from time decay. Consider buying the RIG May 42.5 puts for $0.56 and selling the RIG May 45 puts at $0.94. This spread collects $0.38 and has a market-implied chance of about 75% of keeping that credit as long as the stock is above $45 at May expiration. In other words, this spread will profit if RIG trades higher, sideways, or even if the stock declines by as much as 14% over the next couple of months. We may look to exit the spread to limit losses if the stock closes below $47.
Trades: Buy to open RIG May 42.5 puts for $0.56 and sell to open RIG May 45 puts at $0.94.
OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits.
Jared can be followed on Twitter at twitter.com/CondorOptions.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV