The massive moonshot striking oil service stocks and offshore drillers last week is fading rapidly. After nearly doubling in price Transocean LTD (RIG) has fallen 21% amid heavy profit-taking.
Such giveback is to be expected, however. Virtually every Transocean shareholder on planet Earth is underwater due to Transocean’s atrocious performance in recent years.
That’s the thing about a stock at all-time lows. Not a soul is sitting on a profitable position. A bonanza of wounded bears are waiting to unload their shares at higher prices, creating a mass of overhead resistance.
Which isn’t to say recovery is impossible, it’s simply more challenging and destined to be littered with numerous setbacks.
On a positive note, RIG remains above its 50-day and 20-day moving averages, suggesting the short-term trend is still pointing higher. If you’re a believer in the stock’s newfound strength, the current pullback should be a much more attractive entry than last week’s.
Click to Enlarge
With Transocean stock having retraced 50% of its prior ascent now is the time for bulls to put up or shut up.
While the stock does have a bit further it could fall without doing too much damage to the budding uptrend, buyers better show up in force before shares slide back below the 50-day MA (currently sitting at $10).
Bet on a RIG Bounce with Naked Puts
The excessive volatility in Transocean shares has really amped up option premiums. Out-of-the-money calls and puts are juiced providing profits aplenty to traders willing to step up and sell them.
If you’re willing to bet the further downside in RIG will be muted in the months ahead consider selling the April $9 put for 42 cents. The max reward is limited to the initial 42 cents and will be pocketed if Transocean sits above $9 at expiration.
By selling the put you obligate yourself to buy 100 shares at $9. Since you received 42 cents premium up front your cost basis will actually be $8.58. Those wishing to sidestep assignment could close the trade by buying the put back if Transocean slips below $9 in the month ahead.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
