Thursday, July 8, 2010

Price International (PDE) - Takeover Order Flow Creates Trading Opportunity

PDE closed yesterday at $24.25. The LIVEVOL™ Pro Summary is below.

Pride International, Inc. is an offshore drilling contractor. It provides contract drilling services to oil and natural gas exploration and production companies through the use of mobile offshore drilling rigs in the United States and international waters.

The stock finished up about a dollar yesterday, drifting upward with the rest of the market momentum. The Tick Chart snap is included (click to enlarge).

The company traded over 17,200 options (if you exclude cancelled trades, it traded ~10,000) on total daily average option volume of just 2,961. All but 141 contracts were calls yielding a 122:1 call:put ratio. The action was in the July 27.5 calls, were 9,500 traded (purchases). The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates that the July 27.5 calls are mostly opening (compare OI to trade size). The prior OI opened in late May and is also long. This feels like a takeover bet as expo is fast approaching.

The Skew Tab snap (click to enlarge) illustrates the vols by strike by month.

We can clearly see the crazy vol in the July 27.5 calls - a wild upward bend in the skew. If you want to get long this stock, buying the Aug 25 calls and selling the July 27.5 calls could work (but sell them at a good price, not just any price). If there is a takeover, it's a winner. If not, once July rolls off, you could go ahead and sell the Aug 27.5 calls or close out the position entirely. Of course, this loses if the stock goes down in the next few days.

Finally, the Charts Tab (6 months) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

We can see the stock climb off the lows; like a lot of the drillers. IV30™ and HV20™ have converged.

This is trade analysis, not a recommendation.

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  1. Interesting, Ophir

    Why you suggest Aug 25 calls, not 27.5?


  2. If a takeover does happen, the Aug/Jul 27.5 call spread is a loser. Also, all the stocks in this industry look like they are bouncing, so getting a call on the cheap AND getting the opportunity for a takeover feels like a reasonable approach if someone wants to get long.

    The Aug/Jul 27.5 call spread can work too certainly.