Thursday, February 21, 2013

ORIG: A question of logistics

Ocean Rig UDW Inc. (ORIG) broke below its 20-day price channel on Thursday, giving a bear signal within a pattern that could, at this point, as easily be interpreted as a correction within an uptrend.

The breakout level, $15.40, is above the swing low of $14.95 set Jan. 16 in a stair-step upward from $14.34 on Dec. 31 to a swing high of $17.99 on Jan. 30.

A fall below the $15.40 level would suggest that the uptrend has reversed.

ORIG has broken out nine times since trading began in September 2011, four times to the downside. Three of those four signals produced a profit, with an average gain from winning trades of 8.2%. Adjusting the gain by the odds gives a score of 6.2%, which is excellent.

The stock lacks an extended trading history, meaning there aren't many breakouts on which I can base my odds.

Longer term the chart shows major resistance at $18.40, a level tested five times since trading in ORIG began in October 2011. The price is approaching that level again, and if history means anything, it suggests a reversal will be at hand.

Or not. History is not prophecy.

Ocean Rig, a Stavanger, Norway offshore drilling company, is a subsidiary of the shipping company DryShips Inc. (DRYS), which this month has been reducing its stake in ORIG. The share sales concluded on Feb. 14 and left DryShips with a 59% stake in Ocean Rig.

ORIG doesn't have a wide following among analysts. The handful in its coterie are enthusiastic about its prospects.

The five quarters of earnings available, given the youth of the issue, present a mixed picture: Three winners and two losers; one positive surprise and three negative shockers.

The company reports a small return on equity of 1% with a high level of debt amounting to 92% of equity.

Institutions own 24% of total shares -- the total includes DryShips' considerable holdings -- and the price has been bid up to where it takes $2.18 in shares to control a dollar in sales.

ORIG on average trades 999,000 shares a day, based on the past 10 days. However, volume has been inflated by the DryShips' share sale. A more reasonable average would be somewhere below 100,000.

That's insufficient to support option liquidity. Open interest is mainly in the single digits with a few double- and triple-digit strikes to add some spice. The bid/ask spread on the front-month at-the-money puts is 12.2%, a fairly crippling level.

Shares, it turns out, have an even greater 18.9% bid/ask spread, which is really unusual for shares.

At this point, I need go no further in my analysis.

Decision for my account: The option illiquidity means that options aren't an option (so to speak). It's a bear signal, and the only way to play it without options is to short shares.

ORIG shares can't be shorted. It's too small for that game. Plus, the stock bid/ask spread turns me away from the position; I'm just not willing to absorb that much overhead to make a trade.

There's no barrier in the chart to opening a position. The problem is all in the logistics of trading. And in my business as a trader, as in Ocean Rig's as a driller, logistics count.


My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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