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This morning I am recommending a bullish trade on Transocean Ltd. (NYSE:RIG), the offshore oil and gas contract driller.
Crude oil prices have fallen dramatically, making this a bearish time for oil and energy stocks. But RIG seems to have found a bottom, and if it turns around now, it could head higher over the next few months.
By using a call debit spread with an expiration later in 2019, we can take a cheap position on this energy stock. This is still a long-shot trade, but we also aren’t risking much by taking it.
Falling Oil Prices
As you can see in the chart below, crude oil prices have been falling since late April.
Daily Chart of Crude Oil — Chart Source: TradingView
The first reason for that is that there is a lot of supply around the world.
But the second reason has to do with the slowing global economy. Last week, we saw attacks on several oil tankers near the Strait of Hormuz. And although crude oil prices did spike on that news, they were not up nearly as much as I would have expected.
Last Friday, the International Energy Agency cut its estimate for global oil demand for the second month in a row from 1.3 million barrels a day to 1.2 million barrels a day.
The tanker attacks lowered our supply, but the lower supply was matched by lower demand. At this point, weak demand and more supply are likely to lead to lower crude prices.
Again, this is bearish news for companies like RIG. And as of this week, we’re seeing fewer oil and natural gas rigs in the U.S. according to a report from Baker Hughes, a GE Company (NYSE:BHGE). A reduction in rigs is going to negatively impact RIG.
But if we look at RIG’s technical formation, it looks like it’s turning around.
RIG is Finding a Bottom
RIG hit a new 52-week low on June 14. There’s no disputing that the slowing demand is negatively impacting this company. But if you look at the daily chart below, you can see that yesterday, RIG made a small move up.
Daily Chart of Transocean Ltd. (RIG) — Chart Source: TradingView
It’s too early to say that RIG has found a bottom, but falling oil prices and RIG’s new low have made call options cheap. Using a call debit spread we can take a bullish position at an even lower price.
RIG jumped nearly 3% yesterday despite continued bearishness for energy stocks. I’ve selected a lower strike price of $6, which means at its current price of $5.58, it doesn’t have to move far to put us in the money. That’s why I’m recommending this long-shot bullish trade.
Using a spread order, buy to open the RIG Nov. 15th $6 call and sell to open the RIG Nov. 15th $7 call for a net debit of about $0.32.
Note: Be sure you are opening the monthly RIG options that expire on Friday, Nov. 15, 2019.
About Debit Spreads
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this call debit spread is a way to lower the cost of buying bullish call options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.
