Big Valaris Option Trades Could Signal Institutional Interest

Valaris VAL traded lower by 7.6% on Wednesday as oil prices tumbled to new seven-month lows. Despite the sell-off, some unusually large Valaris option trades on Wednesday suggest at least one trader with deep pockets is betting on more weakness ahead.

The Trades

On Wednesday morning, Benzinga Pro subscribers received eight options alerts related to Valaris within a 20-minute stretch.

From 9:25 a.m. to 9:35 a.m, likely a single trader made seven different large Valaris put purchases at the ask price. All together, the trader bought 24,218 Valaris put options at a $2 strike price that expire on March 20, 2020. The puts were purchased at ask prices of between 30 cents and 40 cents and represent more than a $726,000 bearish bet on Valaris shares.

A final trade came through at 9:43 a.m., when likely the same trader sold 3,081 of the same Valaris put options at the bid price of 35.1 cents. The final trade represented a $108,108 bullish bet.

All together, the total value of all the Valaris put options purchased on Wednesday morning totals more than $600,000.

See Also: How To Read And Trade An Options Alert

Why It’s Important

Due to the relatively complex nature of the options market, options traders are generally considered to be more sophisticated than the average stock trader. In addition, large options traders are often professional, wealthy individuals or institutions, either of which could have unique insight or information about a company. Even traders that stick exclusively to stocks watch the option market closely for unusual trading activity as an indicator of where the “smart money” is focusing.

Unfortunately, because stock investors often use put options to hedge larger bullish stock positions, there’s no way to be 100% certain whether an option trade is a standalone purchase or a hedge against a stock position.

Given the large size of the put buys on Wednesday morning and the fact they seem to have been broken up strategically into smaller lots, there’s a good chance they were institutional hedges, suggesting all the put buying may not be as bearish as it seems.

What's Next

Given the unpredictability of the global geopolitical market right now and the fact that the break-even price for many of these puts is below $1.70, there’s a good chance an institution is hedging against a worst-case scenario: bankruptcy. If the trade war eventually triggers a recession in the U.S. and/or China, global oil demand could take a huge hit, sending oil prices to new lows.

Offshore drillers like Valaris have some of the highest break-even prices for their production and would potentially face the most hardship in the event of a steep drop in oil prices.

On Wednesday, U.S. government data revealed America crude stockpiles rose by 2.4 million barrels this week, much worse than the 2.8 million-barrel draw analysts had anticipated. The latest stockpile data could be an early sign that the trade war is finally making a meaningful impact on demand.

The good news for Valaris investors is that hedging against a potential bankruptcy means the institution responsible for Wednesday’s trade may have a much larger bullish stock position as its primary position, ultimately betting on a rebound. The long-dated puts may simply be relatively cheap insurance against the possibility that Valaris is unable to weather the storm.

The stock traded around $4.57 per share at time of publication.