Transocean In-the-Money Calls Active

Ahead of RIG earnings, February 70 calls have been active today.
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By Jud Pyle, CFA, chief investment strategist for the Options News Network

Transocean LTD

(RIG) - Get Report

is due to report earnings tomorrow ahead of the opening bell; analysts are expecting per-share results of 2.67, a drop of about 29% from last year's third-quarter results. The February 70 calls have been active today ahead of this report.

Volume on these in-the-money calls has reached nearly 16,000 contracts today. Given that open interest heading into Tuesday's session was 364, these were likely traded to open.

Two blocks, totaling 13,750 contracts, changed hands at 12:34 Eastern Time, trading at an average price of $18.525. These traded near the ask price, suggesting they were initiated on the buy side. The calls are currently up $1.85 on the day, with the stock trading up $1.24. Options cannot have delta greater than 100, so it is evident that call-buying activity is ramping up implied volatility: It's up to 50 for this call.

It's rather interesting that investors are buying these deep in-the-money calls ahead of tomorrow's earnings report. This could be a stock replacement strategy, where the investor is selling the shares outright, but buying the call in case there is further upside.

The maximum risk for a long call is the premium paid (in this example, $18.525 per contract, about $15.50 of which is intrinsic value). In some cases, this can be less of a risk than owning the stock outright.

Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.

Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."