RIG: Getting Jacked Up (video)

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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%). 

RIG, HAL, and BHI YTD Returns
Source: CSI Data, Amibroker


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. 

RIG, HAL, and BHI 60-day Implied Volatility
Source: Livevol Pro


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. 

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At the time of publication, Jared Woodard held no positions in the stocks or issues mentioned.