Wednesday, February 26, 2014

Transocean (RIG) - Has the Option Market Underpriced Risk into Today's Earnings?

RIG is trading $43.43, up small with IV30™ up 1.1%. The Symbol Summary is included below.

Provided by Livevol

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

This is an earnings note with the earnings release coming today after market close and there is a remarkable volatility story here which is quite noteworthy.

Let's start with the Charts Tab (two-years) below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

On the stock side we can see the price has swung quite a bit but endpoint-to-endpoint over two years the stock is down ~18%...not so good...

But this is a volatility note... an eye-popping one.

The IV30™ chart in isolation is included below over the same two-years.

Provided by Livevol

I have drawn in that yellow horizontal line to show where the current IV30™ is relative to the past two years.  Basically... low.  For a one-yer measure, the IV30™ is in the 39th percentile... And earnings are due out today.

But there's more... Note the blue "E" icons.. .those represent earnings dates.  The current IV30™ is lower for this earnings release than any in the last two-years.

I have included below that same IV30™ chart, but deleted everything other than the pre-earnings date volatilities.

Provided by Livevol

Now we can see really clearly that the vol into this earnings release for RIG is low at an unprecedented level.  That's odd in and of itself, but what if we throw in this tidbit about the stock:

RIG hit a 52 wk. low  21 days ago and is just $2 above that level.

Does this feel like earnings risk should be at multi-year lows?... The option market says, "Yes."

Finally, let's turn to the RIG Options Tab.

Provided by Livevol

The at-the-money (ATM) straddle is the $43 strike and is pricing RIG to be in the range of [$40.70,$45.30] by the end of Mar expiration... Note, that reads the end of Mar expiration, not the end of tomorrow.  these are Mar monthly options and they don't expire until Mar 21.

For the curious reader, RIG also has a parabolic skew going into earnings. To read more about option skew, what it is and why it exists, you can read the post below:
Understanding Option Skew -- What it is and Why it Exists

Please note, I am pointing out low implied volatility into earnings (a factual observation), not recommending a trade.

This is trade analysis, not a recommendation.

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