Each week, I’ll give an overview of a stock and Licia Leslie will follow that up with a chart analysis the next day. Bill Griffo will chime in with macro analysis and Andrew Giovinazzi will then finish out the week with a volatility breakdown.

Have a stock YOU want us to review? Email my team here. – Mark

Hey Traders,

We are on to Transocean LTD (Ticker: RIG) in our latest adventure with the Option Pit crew. 

I have to say – if there is one business that you wouldn’t want to be in … it’s Offshore Oil Drilling. 

The regulations, technical difficulties, and all the rest to pull oil out of the sea must be daunting. And few companies have been doing it longer than RIG.

The first 5 months of the year have produced a near flat performance. The IV has responded in kind, as longer dated premiums have concentrated at the low end of the range.

3 and 6 month implied vol with 30 day realized vol for RIG

What is the secret to trading vol in a range?

Will It Break Out of the Vol Range?

Low priced stocks like RIG tend to have the implied volatility hit a floor and stay there. The stocks don’t move, nor does the IV. 

Will RIG ever regain the growth trajectory it had prior to the big oil bust of 6 or 7 years ago?  

The jury is out on that, but the IV is very low right now.

Below is a one year RIG chart. As anyone can see, IV and realized vols are very cheap, near the bottom of the range. And the lower the IV goes, the more I want to buy options near the money with a very long time frame.

3 and 6 month implied vol with 30 day realized vol for RIG for the last 12 months

For RIG, there could be a 1 x 2 put spread 3 months out with an upside call – the idea being the upside call is partially financed by the 1 x 2 put spread. 

Remember, the 1 x 2 put spread buys options near the money and sells them OTM. That way, the call is partially financed by the spread.

The trade would pay from $3 up to wherever RIG could go in a bull market for oil. We just need another bull market for oil.

To Your Trading Success,

AG