After falling 45% in 2017, now Transocean LTD (NYSE:RIG) stock is trying to base for a rebound. The Donald Trump rally that started in November 2016 is long gone and then some. So now the weak hands may have fallen out so the stock could have a chance to stabilize.
On the way up, RIG stock looked like a rocket ship with acceleration that allowed for very few entry points. On the way down it has been a falling machete that cost a lot of traders a few fingers. The intrinsic value of RIG has to come into play soon.
Fundamentally Transocean stock is cheap from a price-to-earning perspective, so there is little fluff left in the price. Also, analyst expectations are too subdued, so there is virtually no chance of negative surprises from that front. Yet still technically RIG stock looks daunting for anyone thinking about going long.
Click to Enlarge Today I want to add a little speculation to my portfolio, so I will step up and add a bullish RIG trade.
My thesis is technical. Transocean looks ripe for a bounce. But rather than buying the shares outright and risking $8.20 per share, I will buy calls to capture the move with less risk.
In addition, if RIG stock falls another 15%, I am willing to temporarily own the shares. So to completely eliminate my out-of-pocket expense, I will sell puts against support to offset the cost of the calls.
If price stays above my sold puts, then I would be long the calls for free. And in this case, any premium I recoup from selling the calls would be pure profit since my base cost is zero.
RIG Stock Trade Idea
The Upside Bet: Buy RIG July $8.50 calls for 35 cents per contract. Here I need price to rally through my strike to profit and the faster the better.
To mitigate my risk, I will lower my out-of-pocket expense.
The Bank: Sell RIG Nov $7 put and collect 55 cents to open. Here I have a 75% theoretical certainty that I will be able to retain the premium as profit.
The result of both trades is a net credit, so as long as Transocean stock stays above $7 per share through November I am already profitable without anything happening. Any premium I recover from the calls would be incremental profits.
Selling options is risky business, so I never risk more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
