Update on RIG Trade, courtesy of Daniel Jones at Options Notions. 
This is an inter-week UPDATE on the currently outstanding put spread we have on Transocean Offshore (RIG). This original recommendation was made 14 July 2008, when the stock was $147 per share, and through yesterday’s earnings release, we have seen the stock decline about 10%, somewhat in line with what we expected. Our expectations were based upon the potential technical weakness we saw, and some "sell the news" activity after earnings. In our original thesis, we also noted that despite seeing good news on the stock in early July with the award of a contract of significant size, the stock reacted downwards.
The original recommendation was to buy the August $145 puts for $7.20 and sell the August $130 puts for $2.10, for a net cost of $5.10 to this spread. We urged investors to then look to sell this spread at a price of $11.20 over the next month, and went so far as to recommend that this this ‘trigger’ be entered with your broker since these were August expiration options.
Today we are seeing that $11.20 level as RIG trades around $131 – $132 post earnings. We’ve seen that $11.20 level this morning in the net value of the RIG August spread, so we’re publishing this note to remind readers to exit the trade. If you entered that sales target, you should be out, otherwise with only about 8 days remaining on these options, it is time to exit.
Total return on this $5.10 cost basis would be 120% – an exit at $11.20 would give a $6.10 profit per spread, on a cost basis of $5.10. To be truthful, we’d like to be really cute and recommend a call spread on RIG – we’ll probably get to that early next week. We’re going to watch this market unfold and try to find a little better handle on its direction. On a company-specific basis, though, we did like the results RIG posted, and the noises they are making regarding buying back stock or declaring a special dividend are the right things to be saying to investors in this market. Stay tuned to this company….
The chart above shows RIG shares for the last six months. The stock has fallen off a little in the last 3 weeks, giving us an opportunity to jump out of our put spread at a nice profit.
The Relative Strength Index (RSI) and Moving Average Convergence / Divergence (MACD) stochastic lines are both slowly rounding, and given last week’s gains in earnings and talk of a special dividend, we’re looking at this as a candidate for a call spread.
Recommendation: We recommend investors sell the August put spread in RIG options. We would look to sell this spread at a price of $11.20 over the next month, and this ‘trigger’ can be entered with your broker. Please note that these options have only 8 days now to expiration, so we think entering that sales price target with your trading broker is a good idea.
