Oil Spill Got You Fuming? Try These Option Ideas on BP (BP)

While BP plc (BP) has borne the brunt of the Deepwater Horizon disaster fallout, Transocean (RIG) has clearly caught some shrapnel as the original owner of the rig (BP had been leasing it since 2001). Since the April 20 accident, RIG shares have given back more than 40% of their value, but like BP, they are attempting to pare some of these losses. RIG hit a short-term bottom of $41.88 on June 9 and is trading nearly 25% off this nadir.

Today, however, despite strength in BP, oil-related ETFs, and the broader market, RIG is down nearly 4% to $51.97 without any company-specific news to account for this pullback. Late Monday, Interior Secretary Ken Salazar recommended new suspensions on deepwater drilling on the outer continental shelf.

On StockTwits today, traders are a bit confused about the stock’s underperformance. User hedgefundinvest said “If there is one stock that needs medication for bipolar activity, it is RIG. Dose it up with meds. Fascinating to watch though.” Another StockTwits participant, stockdemons, asked, “RIG getting hammered now … news?” to which oktobernv replied, “Extension of the moratorium. Obama [expletive deleted].”

RIG has indeed been fascinating to watch between its price action and the daily developments in the Gulf. For investors who feel comfortable trading options on the oil services name, we have laid out two strategies below (one bullish, one bearish).

Bullish Strategy: LEAPS Long Call

Investors who believe RIG may have upside potential, at least in the long term, could consider buying LEAPS calls. The January 2012 40-strike call, which has nearly $12 in intrinsic value, is currently priced at $20. The call buyer can potentially lose 100% of the premium paid, but can also enjoy unlimited upside if the stock rallies. At expiration, breakeven is $60. Currently, however, this call has a delta of roughly 70%, meaning the calls should gain 70 cents for every one-dollar increase in RIG shares.

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Bullish Strategy: Bear Call Spread

In late June, RIG shares topped out around $55 before retreating lower for the next week. The stock was approaching this level again this week before today’s drop. For investors who think $55 might prove to be insurmountable over the short term, consider selling the August 55/60 call spread for a net credit of $1.60 each. If RIG is still trading below this strike when the options expire on August 20, the investor keeps this credit as profit.

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The maximum risk is capped at $3.40, or the difference in strike prices minus this credit. This occurs only if RIG is trading north of the $60 level when the options expire. Breakeven at expiration is $56.60, or the short call strike plus the premium collected. This strategy is moderately bearish because it allows for 6.6% of upside in RIG (before expiration) before the spread is in losing territory. Investors who are more bearish in their outlook could consider a long put or an in-the-money bear call spread, which could collect a higher premium but have lower probability of profitability.