Schaeffer's Midday Options Update Features Transocean.

CINCINNATI -- Today's Schaeffer's Midday Options Update features Transocean (NYSE:RIG). The Midday Options Update contains a brief commentary on the day's most notable activity and a table listing the most-active calls and puts for the day. The Midday Options Update is published every day at www.SchaeffersResearch.com - the home of Bernie Schaeffer and Schaeffer's Investment Research.

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Options Update: Transocean Options Speculation on a Takeover?

The major market indices are enjoying a broad rally as we head into the final hour of the trading week. Adding a bit of volatility to the mix, today is a quadruple-witching Friday, which means that equity options, treasury and interest rate options, currency options and futures, and all security futures are expiring. This phenomenon happens only three times per year.

Most-Active Options Update

At 3:06 p.m. Eastern Time, the Dow Jones Industrial Average (DJIA - 12,451.1) has added 34.5 points, while the S&P 500 Index (SPX - 1,427.94) has jumped 2.45 points. The Nasdaq Composite (COMP - 2,458.1) has advanced 4.2 points. At 3:07 p.m. Eastern Time, 4,564,647 calls have changed hands compared to 2,968,053 puts, equaling a single-day put/call volume ratio of 0.65. The CBOE's equity put/call volume ratio stands at 0.65, while the ISE's ratio weighs in at 0.63.

Transocean

Oil-services stocks have found themselves back en vogue during the past couple of sessions, and options players are jumping at the chance to speculate on this volatile group once again. Looking at today's most active options listing, one contract stood out like a blazing oil-well inferno. Transocean's (NYSE:RIG) February 100 call has seen more than 24,000 contracts cross the tape so far today, and open interest currently rests at a miniscule 531 contracts. Now that really grabbed by attention, so I decided to drill down and see what exactly was going on with this volume.

Scanning the blocks of options changing hands on RIG, there was one block of 1,059 contracts crossing between the bid and the ask prices, and one notable contract of 1,750 contracts that crossed at the ask price of 75 cents per option, or $750 per contract. Just down from that last block was the motherlode of the session. One block of 15,750 contracts had traded at 11:11 a.m. Eastern time at the ask price of 75 cents per option, bringing the total outlay on this considerably bullish bet to roughly $11.81 million. That's one hefty chunk of change.

So, why would I consider this block a "considerably bullish bet?" Currently, there are only 531 contracts open at RIG's February 100 strike, indicating that closing of open positions is out of the question. Furthermore, these contracts crossed at the ask price, a good indicator that whoever initiated the trade bought the options. Finally, the 100 strike is about 17 points out of the money right now, with RIG trading just above the 83 level. Cumulatively, it appears that someone, an investor or an institution, has made a rather bullish bet that RIG will close above the 100 level by February options expiration.

Scanning the news on RIG, I didn't find anything on the surface (up coming earnings, a recent buyout offer, a recent merger deal) that would have prompted such a speculative move from options players. Then I ran across a note on Briefing.com from November 27 that listed RIG as a potential takeover target, citing the oil-services company's low P/E ratio and its ability to generate lots of cash.

Despite the speculation in the options pits, the stock itself has seen very little reaction - at least compared to today's options activity. The security has been in a nice uptrend along its 10-day and 20-day moving averages since early October. However, RIG has now run into overhead resistance at the 84 level. This region held the shares in check in early June, and capped the stock again in May.

From a long-term perspective, RIG looks quite solid. The equity has enjoyed the support of its 10-month and 20-month moving averages since November 2003. In fact, the stock has not closed a month below this dynamic duo during this time frame.

On the sentiment front, there is a little pessimism levied against RIG. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.00 ranks above 77 percent of those taken during the past year. However, this ratio could see quite a jump come Monday following January option expiration and the addition of that February block of 15,000 contracts at the 100 level.

Elsewhere, short sellers could be a little more bearish toward RIG (at least for my liking), as roughly four percent of the stock's total float is sold short. But it is the analyst ratings that really reins me in on a bullish outlook for the stock. Currently, 15 of the 18 analysts following RIG rate the stock a "buy" or better. Downgrades could certainly prove troublesome for the security.

With crude prices constantly in flux, and the nearly certain uptrend that energy related stocks enjoyed during the past couple years now in question, any bullish position on such equities is a bit more risky than it used to be. In RIG's case, the overhead resistance in the 84 region worries me quite a bit, but should speculation on buyout activity spread from the options pits into the shares, we could see a nice pop from the stock. Ceteris paribus, I would wait until RIG either breaks out above this resistance or is finally rejected.

As always, thank you very much for reading and good luck with your trading!

Click here to see a Monthly chart of RIG since November 2003 with 10-month and 20-month moving averages and a Daily chart of RIG since May 2006 with 10-day and 20-day moving averages: http://www.schaeffersresearch.com/wire?ID=17886 .

The best way to take advantage of the timely Schaeffer commentaries is to sign up to receive their free e-newsletters -- Opening View, Market Recap and Monday Morning Outlook. Click here to have the Schaeffer's commentaries delivered to you free via email every day and get entered to win an iPod Nano. http://www.schaeffersresearch.com/redirect.aspx?CODE=PRMOU13M&PAGE=1 .

About Schaeffer's Investment Research (www.SchaeffersResearch.com)

Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com , is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology: http://www.SchaeffersResearch.com/method .