BP plc (NYSE: BP )
shares are showing strength and far outperforming the broad-market
losses on the day Tuesday without any company-specific news on the
wires, and it looks like at least one investor expects the upside
to become a longer-term trend.
Shares of the oil and gas name have gained 62 cents, or more
than 2%, to $27.67 during afternoon trading while the broader
market hovers about 3% in the red. The stock reached a 52-week low
yesterday at $26.75. There is takeover chatter once again
making the rounds Wall Street's rumor mills that is helping to
support the shares today. Options action on the tape suggests at
least one investor was willing to buy a call spread to bet on
possible upside during the rest of the year.
By 1:22 p.m. EST, roughly 30,000 January 2011 30-40 call spreads
had changed hands thanks to an investor who paid roughly $3.40 per
bullish spread. The lower-strike calls changed hands for $5.15 per
contract (the ask price at the time of the trade) and the
higher-strike calls crossed the tape for $1.75 per contract (below
the bid price when the volume traded). The January 2011 30 calls
are home to current open interest of 8,700 contracts and the
January 2011 40 calls are home to current open interest of 20,000
contracts, indicating the investor most likely opened the bull call
spread on a bet that BP shares will be trading higher than $33.40
at January 2011 options expiration.
This trade could make a maximum profit of $6.60 per spread if
the stock is trading higher than $40 when the options expire. On
the other hand, if BP shares are still trading lower than $30 at
expiration, the investor loses the premium paid, or $3.40 per
spread. This spread has roughly a 25 delta, meaning that in
the short term, this spread should appreciate by about 25 cents for
every dollar the shares rise. That would equate to roughly a
7% return on investment for every 3.5% increase in the shares from
here. Implied volatility of the January 2011 30 calls is 71%
while the January 40 calls have an implied volatility of 61%
compared to the stock's 30-day historical volatility of 93%.
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