×

Why this battered stock could keep diving

Shares of Transocean are already down 36 percent this year to hit a 10-year low, with no help offered by the recent slide in crude oil prices. But if one big options trader is right, the stock is set to fall another 20 percent by May.

On Thursday, a major options player bought 20,000 May 26-strike puts for $1.65 each. This trade, which cost $3.3 million, will only make money if Transocean shares fall below $24.35 by May expiration. The stock closed at $31.58 on Thursday.

Interestingly, this options buyer was not alone. On Thursday, options volume ran at 2½ times the average daily volume.

Read MoreWhy the crude oil crush could accelerate

So what was behind the trade? Dan Nathan of RiskReversal.com says it looks like a hedge.

"I think it's probably protection buying," Nathan said Thursday on CNBC's "Fast Money." "You have an equity that has a market cap of about $11.5 billion. This company has about $10 billion in debt and $2 billion in cash, and I think this could be some protection for people who hold the debt—or, obviously, for stock holders."

Transocean rig, Gulf of Mexico
Getty Images
Transocean rig, Gulf of Mexico

In other words, those who are worried that the company will run into credit trouble could be putting on this trade to hedge against Tranocean's further decline.

So, will the stock indeed keep sinking? On a technical basis, Nathan is none too optimistic about Transocean's prospects.

"This is quite possibly the worst chart I've ever seen," he said.

Latest Video

Tutorials

Host Bio

  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

Options Action Traders

From Our Sponsor

Options Action Newsletter:

Sign up to receive exclusive Options Action content. Each month you'll receive an exclusive message from host Melissa Lee and insight directly from one of the members of our Options Action panel. Keep your pulse on the market with the Options Action newsletter.

Please enter a valid email address
To learn more about how we use your information, please read our Privacy Policy.