Call Options Or Put Options On SeaDrill (SDRL)?

| November 26, 2014 | 0 Comments

offshore-drilling-companiesOffshore driller SeaDrill (SDRL) is taking it on the chin today. The company announced the suspension of its dividend, and investors aren’t pleased.

SDRL shares are currently trading at $16.59, down 20% on the day. The stock is trading 58% below the 52-week high of $39.36 and is now 18% below the previous 52-week low of $20.20.

Is this an opportunity to buy call options on SDRL because today’s plunge is an overreaction? Or should you buy put options on SDRL because suspending the dividend is bad news? 

The bulls make a convincing argument…

Of course, anytime a company suspends its dividend, it doesn’t send a good message to investors. However, in SDRL’s case, it was probably the best move at this time.

The company has billions of debt to retire, and the plunge in oil prices was negatively impacting cash flow. The company needs the extra $2 billion a year from dividends to go to paying down debt.

Not only will the company’s balance sheet be much better off moving forward, but management also plans a share buyback as well. Ultimately, this is going to be a good thing for SDRL.

But the bears have a compelling case as well… 

It’s hard to put lipstick on this pig. Suspending a dividend is suspending a dividend, no matter how you try to justify it.

The 19% yield may not have been sustainable, but cutting the payout completely is going to scare away many investors. Not to mention, the company’s valuation is going to take a significant hit.

Moreover, it’s going to be even more challenging for SDRL to recover given low oil prices. The company is going to have to deal with lower revenues and profits on top of everything else.

So is it time to be bullish on SDRL due to a cleaner balance sheet or do you take a bearish position because losing the dividend is just too much to overcome?

If you think the bulls are right, take a look at buying the SDRL January 17th 17 calls for around $1.10. 

If you think the bears are right, take a look at buying the SDRL January 17th 16 puts for around $1.25.  

Yours in Profit,

Gordon Lewis

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Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.