Bearish Leverage at Work In Energy Space: Options Recap


Give me leverage, or give me death. That was the message from a big options trade yesterday.

Transocean (RIG) has plenty of leverage on its own. Over $9 billion of debt and $2.3 billion of cash plants it firmly in the junkyard of bond ratings. (“B3” at Moody’s.)

As an energy stock, the company is exposed to a highly volatile part of the market leveraged to the economy. As a service provider in the boom-or-bust offshore drilling market, it’s even more leveraged to swings in sentiment.

If that’s not enough leverage for you, check this out:

  • A trader sold roughly 14,000 January 2020 5 puts for about $0.55.
  • At the same time, they purchased 50,000 January 2020 3 January puts were bought for $0.12.
  • That translates into a net credit of about $170,000.

Volume was below open interest in the 5 puts but not the 3s. That suggests an existing bearish trade was closed and rolled down to the lower strike. The investor also tripled their number of contracts. Guess what that increases? Hint, it begins with “L.”

Puts fix the price where a security can be sold, so they tend to gain value when shares drop. (See our Knowledge Center.) Yesterday’s trader probably made money looking for a drop and wanted to recover their initial investment. He or she now stand to make even more money from the stock potentially bleeding toward penny status over the next year.

Transocean (RIG), weekly chart, showing slide since October 2014.

RIG ended the session down 3.31 percent to $7.31, and is trying to hold a multi-decade low from August 2017. Given the overall bearishness in energy and the importance of this support zone, some chart watchers may expect further selling if the shares break lower.

Overall option volume was triple RIG’s daily average over the last month, with puts outnumbering calls by a bearish 8-to-1 ratio.

Disclosure: This post is intended for educational purposes only. Options trading may not be suited for all investors.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them apprised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.