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Oil has been on a free fall since October after it was concluded that we are now producing more oil than the demand.
This cut the oil price in half as it fell into the $40s. OPEC has remained strong in that they will not cut their production. OPEC had to make cuts in the past that caused them to lose on market share and they are not going to let that happen again.
Eight weeks of straight losses has put pressure on a wide range of oil related companies. Layoffs have been in the hundreds of thousands, capex spending has been cut, contracts have been broken and companies have begun to shut in rigs. Production if finally beginning to drop and demand is beginning to rise.
Sales of light trucks and SUVs grew by 19.3 percent over the year in January while passenger cars grew at 7.7 percent. Gasoline demand in the United States grew by 500,000 barrels a day in January.
Saudi Arabia, who is the controlling interest in OPEC, has been satisfied with the way the markets are beginning to balance out. They have the ability to weather through short term losses in favor of long term gains.
In hindsight, oil was in a bubble. $100 a barrel was allowing companies free range to do what they want and become over inflated. The market will reach a new equilibrium as companies begin to adjust. We figure oil will hover around $50-60 a barrel.
One of the companies that has been on the chopping block is
Transocean LTDRIG. In October 2014 their price was in the $30s and now they have settled in the $16s. There is a bottom being formed at $15. Short-term and intermediate-term trends are beginning to level out and even move higher according to the 20 and 50 day moving average.
Upon closer inspection, traders can also see volatility is at a high. Currently implied volatility is at 58 percent when it averages in the low-20s. When volatility is above its average and it looks like price movement is beginning to slow we want to be net short options. This might give a good opportunity for a short put spread under the $15 level.
Expiration is 47 days away. If volatility begins to come in because realized volatility is or RIG begins to move higher we should have no trouble reaching our goal credit.
What if RIG does not cooperate? That is the hard support, so a close below that is a bad sign that RIG will begin to move lower. Even if RIG does move lower, there should still be volatility coming in from its elevated state, which will keep losses to a minimum.
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