Monday, May 16, 2011

Transocean (RIG) - Calendar Spreads Open - ATM, OTM and Diagonal

RIG is trading $70.27, up 2.7% with IV30™ up 3.6%. The LIVEVOL® Pro Summary is below.


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Transocean Ltd. (Transocean) is an international provider of offshore contract drilling services for oil and gas wells.

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.  Note that there is an $0.85 divi (or so) going ex possibily just before May expo.  That requires some verification.

Custom Scan Details
Stock Price >= $5
Sigma1 - Sigma2 >= 8
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 <=70
Sigma1, Sigma2 >= 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol® Pro.

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

Looking to the Skew Tab for RIG (below), we can see the elevated vol in the front month (red line) relative to the second month (yellow line).

There's a parabolic shape of the skew for both the front and back months, but the front is more pronounced yielding a greater vol difference in the OTM options than the ATM. Almost all of the strikes look like interesting trades to examine. As far as I can tell, RIG had earnings on 5-4-2011, so this isn't an earnings vol trap.

Now we can turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Check out how the IV30™ relative to the short-term historical vol (HV20™) and the long-term historical vol (HV180™). Specifically:

IV30™: 35.61
HV20™: 27.10
HV180™: 31.50

It looks like vol over 33 (ish) is pretty expensive (substantially elevated to short-term and long-term historical realized vols).

Finally, let's look to the Options Tab (below).

Potential Trades to Analyze
1. ATM calendar spread:
a. The May/Jun 70 straddle calendar sells ~40 vol and purchases ~35.
b. The May/Jun 70/72.5 strangle calendar has about the same vol difference as the straddle.

2. OTM calendar spread:
a. The May/Jun 75 call spread sells ~45 vol and purchases ~35 vol, though the May 75 calls are just $0.14 x $0.17.
b. May/Jun 65 put spread sells ~44.5 vol and purchases ~35.5 vol -- the May 65 puts are worth ~$0.21 to mid-market.

3. Diagonal calendar spreads:
For a calendar spread with more of a delta tint -- selling the higher (lower) strikes in a calendar call (put) spread and purchasing the lower (higher) strikes in Jun for the call (put) spread are also interesting trades to examine.

This is trade analysis, not a recommendation.

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