Offshore oil drilling company Diamond Offshore (DO) is up 13% in the past year, as energy prices have stabilized and started to trend higher. One trader sees a potential pullback through the end of the year.
That’s based on the January 2025 $10 puts. With 270 days until expiration, 2,954 contracts traded compared to a prior open interest of 104, for a 28-fold rise in volume on the trade. The buyer of the puts paid $0.75 to make the bearish bet.
Diamond Offshore recently traded for about $13, so they would need to lose $3, or about 23%, for the option to move in-the-money. Shares have a 52-week low of $10.44, so moving in-the-money would take a new low.
Operationally, Diamond is improving. Earnings surged 35% over the last 12 months, although the company hasn’t yet flipped to profitability. As a result, shares trade at about 24 times forward earnings estimates.
Action to take: Shares recently popped higher and gave back some of those recent gains. Investors may like shares if they expect oil prices to move higher.
However, other oil stocks such as oil majors can also benefit from that scenario. Diamond Offshore does not pay a dividend, but many other energy companies do.
For traders, the January $10 puts are an inexpensive hedge in the event that oil prices decline at any point between now and the end of the year. That trade could potentially see mid-to-high double-digit returns.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.