RIG – Fish or Cut Bait

Fish or Cut Bait…

A key to successful investing is knowing when to get out of a position. For example, the PowerOptionsApplied Titanium TradeFolio(tm) was invested in a covered calls position for Transocean Offshore (RIG). On April 20, 2010 RIG’s Deepwater Horizon drilling rig caught fire and subsequently sank leaving in its wake a huge and growing oil slick in the waters of the Gulf of Mexico. The Deepwater Horizon was being operated by British Petroleum (BP).

The initial impact to RIG as a result of the sinking drilling rig did not appear to be very traumatic, as the rig was insured and British Petroleum appeared to be set up to take the brunt of the blame. However, the oil spill continued to be a focal point of the news media, so even RIG’s stock price was taken to the woodshed.

At the time of the incident, the Titanium covered call position for RIG was significantly in-the-money, so a small drop in price would not affect the overall profitability of the position. However, as the enormity of the oil slick situation began to unfold, the price of RIG began to sink, so-to-speak, and we exited the covered call position for RIG on April 30, for a loss of approximately 8%. An outright long position in RIG over the same time frame would have resulted in a loss of about 14%, which demonstrates the power of investing with covered calls. Instead of realizing a loss of 14% we realized a loss of 8%. And it most likely won’t take too long to recover the 8% loss with investments in other covered call positions.

The price of RIG continues to fall and may continue falling as long as the oil slick situation continues to be front-page news. So for now, we will avoid long investment in RIG.

When to fold’em…

It can be difficult to know when to fold a position and move on. A company reporting a slightly reduced forecast is probably not a situation for making an exit. However, a company involved in a major disaster which is making front page news for several days in a row is definitely a situation where making an exit may be prudent.

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What’s next…

Ultimately this disaster will be resolved and the price of RIG will most likely recover. Investors who are able to accurately time their entry point for RIG could be rewarded handsomely. The capital recovered from the RIG covered call position will be invested in other positions, hopefully recovering the loss sustained for the RIG investment.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

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PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

[tags] drilling rig, oil slick, Gulf of Mexico, Deepwater Horizon, BP, British Petroleum Co., RIG, Transocean Offshore Inc. [/tags]