SDRL: Profits Await in Seadrill for Put Sellers

The effect of the ongoing recovery in oil prices continues to wind its way through the oil and gas sector. The abrupt about-face in oil’s descent was nothing short of a godsend for a broad swath of energy stocks that were literally on life support.

sdril-stock-best-dividend-stocksOne such player in the piplines industry that has followed the recent rise in crude is Seadrill Ltd (NYSE:SDRL).

Since plumbing the depths with a 60% swoon amid the crude crash, SDRL has been able to rally back some 32%. For awhile there it appeared the stock was destined for the single digits, but the oil rebound saved Seadrill from such a lowly figure.

The price chart of SDRL boasts a number of developments that the bulls will find to their liking. For brevity’s sake I’ll limit it to the top three.

  1. Volume patterns have turned decisively bullish. I count no less than six accumulation days over the past month with few signs of distribution. In layman’s terms, big money has been throwing their weight behind the bulls during rallies. Should signs of major liquidation remain absent, Seadrill stock will have an easier time continuing its recovery.
  2. The bottom recently carved out along with the resurgent up trend in SDRL has been sufficient in turning the 20- and 50-day moving averages bullish. With both smoothing mechanisms now rising the bulls deserve the benefit of the doubt.
  3. Perhaps the most promising development is the behavior of Seadrill’s price action itself over the past six weeks. The series of higher pivot highs and higher pivot lows continues uninterrupted and every pullback remains shallow. Provided buyers remain aggressive SDRL should continue its ascent. The 200-day moving average looming overhead seems a likely target in the coming months.
Source: OptionsAnalytix

Drill for SDRL Profits with Naked Puts

With implied volatility still elevated, short option plays continue to be favorable strategies for SDRL. Its cheaper price tag also suggests its a prime candidate for naked puts.

Essentially the low cost of SDRL stock causes the margin requirement for a naked put to be quite small, which generates a much higher return on investment on the trade.

Sell the Jun $13 put for 45 cents or better. The maximum reward is limited to the initial 45-cent credit and will be pocketed if SDRL can sit above $13 at June expiration.

By selling the put you obligate yourself to buy 100 shares of Seadrill at $13. If we take into account the initial 45-cent credit, however, your true cost basis if assigned is $12.55.

At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.

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