Call Options Or Put Options On Transocean (RIG)?

| October 15, 2014 | 0 Comments

Transocean (RIG)While the markets are selling off sharply, Transocean (RIG) is getting hit even harder.  RIG has been the worst performing energy stock in an already depressed sector.

RIG shares are currently trading at $28.08, down 38% for the year.  The stock is trading 47% below the 52-week high of $52.72 and is now 1% below the previous 52-week low of $28.28.

Is this an opportunity to buy call options on RIG because drillers are way oversold?  Or should you buy put options on RIG because there’s no recovery in sight for oil prices? 

The bulls make a convincing argument…

Stocks are selling off hard, but energy stocks have been hit even harder.  It’s especially true of oil drillers and offshore drilling companies.  The plunging price of oil is causing concern over potential profits in the sector.

However, the selling is way overdone.  RIG has gotten crushed to the point where the company’s dividend yield is over 10%!  That won’t keep investors away for long.

Moreover, the stock is trading at just 5.8x earnings and 9.7x future earnings.  Even if earnings guidance is lowered due to the lower price of oil, the company will still be a bargain at these prices.

But the bears have a compelling case as well… 

On the other hand, the price of oil isn’t expected to rebound anytime soon.  That could hurt offshore operations in particular, like RIG, because it’s costlier to produce offshore oil.

Not to mention, oil is dealing with a combination of a supply glut and dwindling demand.  It’s basically the kiss of death for a commodity.

Not only are energy stocks in for a tough ride, but higher priced producers like RIG could take even longer to recover.  The stock may look cheap now, but just wait until earnings projections are revised downward.

So is it time to be bullish on RIG due to the rampant overselling or should you take a bearish position because the price of oil is getting pummeled?

If you think the bulls are right, take a look at buying the RIG January 30 calls for around $2.00. 

If you think the bears are right, take a look at buying the RIG January 27 puts for around $2.25. 

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.