The Striking Price

How To Profit From Listless Energy Stocks

An options trading strategy that pays you if oil stock Transocean doesn’t move much. Plus, a surprise from Corning?

By Steven M. Sears

Saturday, November 21, 2015

Investors are having a hard time making sense of the oil sector, but one trader is using a strategy that could make sense for other agile investors.

Rather than buying oil stocks and hoping to pick the elusive bottom price, this investor gets the options market to pay him for agreeing to buy or sell Transocean ’s (ticker: RIG) stock before December expiration. The approach is a potential template for other energy stocks.

When Transocean was trading around $14, he sold 17,800 December 18 calls at about 12 cents, and sold 32,000 December 10 puts for about 14 cents.

The trade indicates that the investor, who may own the stock, is willing to buy it below $10 and sell above $18. If the stock never falls below $10, or never rises above $18, he pockets what he got for the options.

The stock is off about 7% this year. A bad earnings report released on Nov. 5 should keep shares listless, and more-recent news that oil inventories are at record highs should scare away most investors.

The trade has two key risks: if Transocean’s stock falls far below $10 or rises far above $18. Should that happen, the investor must cover the put or buy stock at $10, even if the shares are trading sharply below that. If the stock shoots far above the call strike price, the investor can cover the call at a higher price, or opt to sell the stock for $18, missing out on a rally. All risks are probably minimal, which makes this strategy worth considering for anyone wondering what to do with sleeping energy stocks.

DECEMBER IS TRADITIONALLY a quiet month on Wall Street, but this year could be different. Investors have begun preparing for extreme stock market volatility, most likely because of the potential for a Federal Reserve interest-rate hike in December.

With CBOE Market Volatility, or VIX, futures around 19, buyers have accumulated 500,000 VIX December 27 to 30 calls. The trading pattern is odd since the consensus view is that a rate hike is good, or at least not bad, for stocks. For the calls to have any real value, stocks must plummet.

Although the notion that someone is betting on more terrorist attacks may seem a little far-fetched, the trading activity merits further investigation by CBOE Holding (CBOE) and federal securities regulators in light of recent events in Paris and threats against the U.S. and others. A little paranoid, perhaps, but bad guys have been known to use the markets to profit from their nefarious deeds.

CORNING (GLW) HAS been a favored Striking Price stock since June 2012 when it introduced flexible glass. At the time, the stock cost $12. With the shares now about $18, below January’s 52-week high of $25.16, an investor bought 2,000 December 18.50 calls for 28 cents that expire on Dec. 4. The call period includes Corning’s appearance at a Credit Suisse conference on Dec. 1. The trade suggests that someone thinks Corning will say something then to make the stock pop higher, so watch the stock as it might be worth adding to the trading menu.

THE FINANCIAL MARKETS lately seem to adhere to hard-to-detect patterns. This was driven home by a recent job posting from a Chicago firm whose name is unimportant. The company said it wants to hire traders with advanced math degrees and at least two years’ experience designing, diagnosing, and optimizing predictive factors of short-term returns for equities and futures using C++/R. Candidates also need experience using the computer language for statistical research with econometric/machine-learning techniques to design predictive models. In addition, the successful candidates are expected to design low latency trading strategies for market making, liquidity taking, and hybrid trading. Remember this ad when simple explanations of why stocks went up or down don’t seem very convincing.

Reprinted by permission of Barron's Online, © 2015 Dow Jones & Company, Inc. All Rights Reserved Worldwide.

The views expressed in the above papers and articles are solely those of the author of the article, and do not necessarily reflect the views of OIC; the information presented is not intended to constitute investment advice or recommendations to purchase or sell securities of any company; and the information presented is based upon particular events that may or may not recur in the future.

Talk to Options Professionals

Questions about anything options-related?
Call or chat with an options
professional now.

Call 1-888-OPTIONS
Speak to an Options Professional!
Chat with Options Professionals

Questions about anything options-related?
Chat with an options professional now.

Start Live Chat
Email Options Professionals

Questions about anything options-related?
Email an options professional now.


  • Free, unbiased options education
  • Learn in-person and online
  • Advance at your own pace