Talisman Energy (TLM), Overview and Trade

Talisman Energy, Inc. (NYSE:TLM, $11.30, off $0.07) is a global gas and oil production company headquartered in Calgary, Alberta, Canada. TLM used to be the Canadian portion of British Petroleum but sold 57% of its shares to the public in 1992 and was eventually re-branded as Talisman Energy Inc. It is the largest independent oil and gas company in Canada with a current market cap of $11.66 billion.

TLM at $11.30 is just above the 52-week low of $10.65 from last November and a shade under 4 points lower than their 52-week high of $15.21 from last September. TLM is trading just below both its 50 and 200 day moving averages of $11.56 and $11.87, respectively. The company has had a disappointing year thus far with year over year quarterly revenue growth shrinking by 43.80% and an EPS of -$0.44. Share prices have fluctuated between $11 and $12 per share since April, but today’s level is the lowest that the company has reached since mid May and the downward trend looks as though it will continue in the future.

Unusual Option Activity:

Analyzing unusual order flow gives traders a window into what the positions that large institutional players have. We noticed a large trade with option volume above the average daily volume over the past 22 days. Here is the trade we saw and the trade we then initiated:

The “Institutional Trade”:

Today a trader bought 6,413 TLM Aug 11 Strike Puts for $.55

Their Risk:         $55 per 1 lot
Their Reward: $1045  per 1 lot (shares at $0)
Breakeven:      $10.45
Cash Outlay:    $352,715

My Trade:

Buying the TLM August 11-10 Bear Put Spread for $.30 debit

(Buying the TLM August 11 Strike Put and selling the August 10 Put)
Risk:          $30 per 1 lot
Reward:     $70 per 1 lot
Reward to Risk: 2.3 – 1
Breakeven:   $10.70

Greeks of this Trade:
Delta:    Short
Gamma: Long
Theta:   Short
Vega:     Long

Comparing the Put Spread to an outright put purchase, the put spread cost $0.30 vs. $0.55 (55% of the risk), breakeven of the spread is $10.70 vs. $10.45 for the outright put purchase.  The put spread does not participate below $10 however.

  • JohnL

    I like the put Aug put spread suggested by Keene, but I see on the charts this stock could go higher as well. The breakeven distance of 10.70 seems ok thinking about it, but looking at the charts that is a pretty good move in such a short time. August expiration is right around the corner. But I want to pay attention to what the institutional traders do also, not just my own views. So I am thinking of doing this as an October straddle. The puts are their idea, the calls are mine. I haven’t decided on the exact strikes to use yet, but at first glance it appears to me the stock can move far enough by October in either direction to at least breakeven but also have unlimited potential for those explosive moves no one saw coming.