A Long-Dated Options Bet on Transocean
Jud Pyle CFA
12/30/08 - 05:10 PM EST
The January 2011 120 strike calls in
Transocean(RIG Quote) were bought more than 20,000 times today for a price of around $3.40.
Shares of RIG finished the day at $46.94, up a little over 1%. A look at this activity gives an interesting view of bottom-fishing, as well as a long-dated option, commonly referred to as LEAPS (long-term equity anticipation securities).
In order for these calls to be profitable at expiration, the stock needs to be higher than $123.40, which is the strike of the call, plus the premium that was paid for the calls. That price level, vs. the current price of the stock, shows us just how far the shares of RIG and companies like it have fallen this year. As recently as Sept. 26, RIG was at $121.83.
Now in just three months, the stock is down over 60%, and the shares need to rally over 150% to get back to those levels. It is worth noting, however, that RIG was pummeled recently, because on Dec. 18, it was removed from the
S&P 500. The reason for the dismissal was because the company redomiciled to Switzerland from the Cayman Islands to take advantage of tax laws.
One way that an investor can make money on these options prior to expiration, however, is if the stock goes higher. The investor does not need to wait until expiration to profit on these options, because as the stock goes higher, the options could go higher as well. Option traders refer to this as the delta: meaning the amount that an option price should change for every $1 change in the price of the stock. The delta on these calls is approximately 22, so for every dollar that the stock rises, the options should go up 22 cents, holding all other factors unchanged.
Another way that the investor could profit on this trade prior to expiration is if the implied volatility of the option rises. Currently, the implied volatility of these options is roughly 55. If that implied volatility were to go higher, then the calls will go up in price, even if the stock stays at $47. Remember, however, as
we pointed out in yesterday's article about
T. Rowe Price(TROW Quote) that if implied volatility goes down, the option can go down, even if the stock rallies.
Investors looking at RIG could therefore find this options activity interesting for at least two reasons. The first is that it is bullish activity that could indicate that someone is potentially bottom-fishing after the declines that RIG has suffered. The second interesting point is that this is a long-term trade. These options expire in more than two years, giving the investor plenty of time for a thesis to play out.
Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Pyle writes regularly about options investing for TheStreet.com.
