Market Overview

Transocean Option Trader Bets $1.3M On Near-Term Downside

Transocean Option Trader Bets $1.3M On Near-Term Downside

Shares of Transocean LTD (NYSE: RIG) traded slightly higher on Wednesday, but the stock has been among the worst performers in the market so far in 2020.

Unfortunately for Transocean investors, even with the stock down 72% year to date, at least one option trader made a big bet that there’s more downside ahead in the coming weeks as oil prices remain depressed.

The Transocean Trades

On Wednesday morning, Benzinga Pro subscribers received two option alerts related to unusually large Transocean option trades:

  • At 11:21 a.m. ET, a trader bought 10,000 Transocean put options with a $3 strike price expiring on Aug. 21. The contracts were purchased at the ask price at $1.301 and represented a $1.3 million bearish bet.
  • Less than a minute later, a trader bought 361 Transocean put options with a $3.50 strike price expiring on Nov. 20. The contracts were purchased near the ask price at $1.95 and represented a $70,395 bearish bet.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader. Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large size of the largest Transocean option trade, there’s certainly a possibility it could be a hedge on a large position in Transocean stock.

Offshore Drillers Under Pressure

Transocean is one of the leading offshore oil drillers in the world, but the oil market has been hammered by a combination of crashing demand due to travel restrictions and shelter-in-place orders and a pricing war earlier this year between Russia and Saudi Arabia.

Bank of America analyst Mike Sabella recently said he believes at least 35% of the world’s ultra-deep-water drillships will be cold stacked by mid-2021, which could help improve the pricing environment for drillers like Transocean. However, Sabella said navigating the current downturn will be difficult from a financial perspective.

He's projecting Transocean will finish 2021 with about $450 million in liquidity, and the company will generate negative $50 million in 2022 free cash flow. At the same time, Transocean has more than $8 billion in debt and $600 million in 2022 debt maturities.

“RIG is likely to face headwinds as pricing for floating rigs is likely to fall in '21, while leverage and FCF are a focus through '22,” Sabella said.

Bank of America has an Underperform rating and $1 price target for Transocean.

In June, Clarksons Platou downgraded Transocean from Buy to Neutral and set a $2.40 price target.

The bull case for oil stocks has taken another hit in recent weeks as the number of U.S. COVID-19 cases has spiked in several key states, including California, Texas, Florida and Arizona. A large second wave of infections could derail the potential oil demand recovery timeline and create even more margin pressures for offshore drillers like Transocean.


Benzinga’s Take

The $1.3-million put purchase has a break-even price of $1.70, suggesting at least 8.6% downside over the next seven-plus weeks.

The put buyer may also be anticipating worse-than-expected earnings and/or guidance from Transocean when it reports second-quarter numbers in late July. Analysts are expecting an EPS loss of 27 cents on revenue of $776.9 million, up 2.5% from a year ago.

Do you agree with this take? Email with your thoughts.

Related Links:

Morgan Stanley Option Traders Bet Millions On 25% Long-Term Downside

How To Read And Trade An Option Alert


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