The volatility in oil lately created a fairly attractive opportunity for those inclined to sell options, and making it quite difficult for those looking to express directional long premium views as options prices in oil stocks (especially highly leveraged ones) are through the roof.
It appears that at least one trader was looking to make a bullish bet in a couple levered oil stocks, by selling near dated out of the money puts:
Marathon Oil (MRO): when the stock was $7.14, 55,000 of the April 5 puts were sold to open at 28 cents, or a $1.54 million credit. If the stock is above $5 on April expiration than the trader would receive the full credit. If the stock is between $5 and $4.72 the trader makes up to $1.54. the worst case scenario is that the stock is below $4.72, down 34% and the trade is put 5.5 million shares and have losses below. The 52 week high in MRO was $31.53 on May 5th 2015, with the 52 week low on Feb 11th at $6.52.
MRO has a $5 billion market cap, $2.4 billion in debt, and $8.4 billion in debt. While this looks a tad levered, there are far worse balance sheets in the oil patch.
The 10 year chart of MRO is amazing, down 85% from its all time highs made in 2014:
But if Oil were to stabilize and even go higher, stocks like MRO would likely quickly move higher. But even if it just gradually moved higher or stopped going lower, options prices would come in fairly dramatically, making this trade a homerun:
Lastly, the 20 year chart of Marathon is pretty epic, a well defined letter M:
Transocean (RIG): when the stock was $7.95 a trader sold to open 38,000 March 7 puts at 26 cents, or $988,000 in premium. If the stock is $7 or higher on March expiration then the trader receives the full credit, between $7 and $6.74 the trader makes up to $988,000. The worst case scenario is that the stock is at $6.74, down 15% and the trader is put 3.8 million shares and suffers losses.
RIG’s leverage ratio is far worse than MRO, with $3 billion market cap. $2.3 billion in cash and $8.5 billion in debt.
Shares of RIG are down 34% ytd, down 62% from its 52 week highs and down 96% from its all time highs made in 2007. Here is a 5 year chart of RIG’s 5 year CDS, showing just a tad of investor concern: