Another big mover has been treasuries. Charts of the ten year bond and yield both look poised to breakout (bonds to the downside yield to the upside). This is both on the FOMC minutes and the government’s ability to avoid the fiscal cliff for now. It appears that the path of least resistance is lower for bonds and that we could be approaching an inflection point in the US dollar in the first half of 2013.
Yesterday the latest chapter of the Deepwater Horizon saga was written when the US Department of Justice reported that Transocean, the owner of the rig, agreed to please guilty to violating the Clean Water Act and would pay $400 million in criminal and $1 billion in civil penalties. Transocean’s stock jumped over 6% on the news, primarily on relief that after this settlement the DOJ will not pursue further prosecution of the company. The stock jumped 6% to close near the day’s highs and saw heavy bullish option trading. One trader bought 884 Jan. 50 calls for $0.65 with the stock at 48.97. This trade will profit if RIG is above 50.65, 3.24% higher, at Jan. expiration in 14 days.
Now that the market knows what Transocean’s liabilities are in the Deepwater Horizon disaster, the stock could move higher. The settlement amount of $1.4 billion will be paid over the next five years and the funds will primarily be used for the benefit of the Gulf region hurt by the spill. The company had set aside $1.75 billion for the settlement, so the stock also jumped on relief that the final settlement was slightly less than provisions. Since the oil spill Transocean’s stock is down about 50% and has been trading at a discount to peers. Now that this suit is behind them, management can focus on growth and the discount to peers should slowly disappear.
That said, it may be a volatile ride as the market sorts out what this means for RIG’s financial position. Therefore the way to play the momentum in the stock is via long calls like this trader is doing. The risk in this trade is only $0.22 but profit is unlimited. When trading volatile, news driven stocks like this the most important thing is to keep reward-risk ratios high when structuring a trade, which means staying away from buying stock and focusing on out of the money options.