Energy Bears Chase Downside in Ocean Driller: Options Recap

Energy Bears Chase Downside in Ocean Driller: Options Recap

Someone seems to think the downside will continue in a debt-laden energy stock.

McDermott (MDR), a provider of services like offshore drilling and engineering, has lost about two-thirds of its value in the last year. Today a large options transaction looked for the stock to keep falling:

  • Roughly 7,000 May 5 puts were sold for $0.25 to $0.30. Volume was below open interest, which indicates an existing position was closed.
  • About 10,000 January 2021 3 puts were bought at the same time for $0.60 to $0.65 in a new opening transaction.

Puts fix the price where investors can sell a stock. That means they gain value when shares decline. (They also have negative delta.)

The fact the trader previously owned the May 5 puts suggests he or she was bearish on MDR and simply rolled their capital from one contract to another. Their new position gives them an additional 20 months for the stock to decline. Making the adjustment cost them $440,000 more.

MDR was little changed at $7.01 in afternoon trading. It’s trying to hold the same price zone where it bounced in early 2015 and again one year later.

McDermott (MDR) chart, with 50-day moving average and put/call ratio.
McDermott (MDR) chart, with 50-day moving average and put/call ratio.

The stock’s taken a beating in recent months, especially after earnings missed estimates on October 31. It also plunged in early February on news of cost overruns at a liquefied natural gas project (LNG).

MDR has about $3.5 billion in debt, roughly triple its market capitalization.

The mix of options activity today was especially negative, the puts outnumbering calls by about 14 to 1, according to TradeStation data.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly 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 appraised 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.