Transocean LTD (NYSE:RIG) stock has had a terrible 2017 falling 34% from the January highs. The stock basically priced out the entire November 2016 Trump and oil-led rallies. Stocks that run this fast are a nightmare to conservative investors. When they are rallying, they appear to be perpetually over-extended causing investors to wait for dips that never come. Conversely when they fall, they look like falling machetes and the instinct is to wait it out too long.
An easy way to handle such stocks is by using options, where I can bend time to create room for error, thereby eliminating the need to find perfect entry points into a trend in either direction.
In this case, Transocean stock is falling like a meteor headed for earth and looks daunting to catch, especially when heading into Wednesday’s earnings report. Buying it here at face value without a buffer is more like gambling than investing.
Don’t get me wrong, this is not an endorsement to short it either. Companies are often inclined to work harder to prop their stock rather than rain on the earnings event, so I don’t want to bet against management.
Besides RIG is cheap relative to its competitors and the analyst expectations are more than humble so if there is any surprise to be had it’s likely to the upside.
Alternatively, I prefer finding support levels where I would be a buyer and sell risk there. Selling naked puts is dangerous but in my opinion less dangerous than buying the shares outright. Case in point, those who bought RIG stock just before the last earnings report are down 20% so they would have been much better off selling the $12 puts instead of buying shares.
Click to Enlarge Today I want to share a trade to repeat that concept into this earnings report. Instead of risking $10.70 without room for error, I will sell risk much lower, thereby creating a safety zone yet staying bullish RIG stock.
RIG Stock Trade Idea
The Bet: Sell the RIG Nov $8 puts naked and collect 40 cents per contact, which is a bullish trade where I have 80% certainty of success. If RIG falls below that strike price, I have already committed to buy it at $8 per share.
A more aggressive buyer of RIG could sell the $9 put and collect 75 cents but have a 15% price buffer instead of 25%
Email sellspreads@gmail.com with questions or join me to learn more about options in a personal 1on1 webinar 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.
