We’ve opened a new bearish trade on Transocean Ltd. (RIG). The global outlook for offshore drillers is looking worse and worse. In the first and second quarter, there seemed to be a few signs of life as oil prices came off their lows, but we believe the recent divergence between stock prices and commodity prices has sealed the deal (at least in the short term) for additional downside for drillers.
Transocean’s group has received a series of downgrades recently as projects are shut down and larger firms scale back within the industry. We expect that pressure to be sustained in the short term as investors deal with uncertainty in Europe and a reluctance to expand energy production. Currently, we are targeting Transocean to make a move back down to March’s lows, which should be an easy achievement if the broader indices drift toward the lower end of their channel.
Use a limit order to buy to open the RIG August 16 Puts (RIG150821P00016000) for a maximum price of $1.25.
Transocean’s chain sheet is liquid enough but we are recommending out of the money options for this trade. That means these options have a wider bid-ask spread, so we strongly recommend using a limit order to enter this position.
A head’s up that after BlackBerry’s (BBRY) roller-coaster ride after earnings yesterday, we’ve exited the trade while the value of our put options is still quite high. Implied volatility levels have not dropped as much as they normally would have post-earnings, which is a benefit, so exit at market for about break-even.
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