Upside bet on BP (BP) boosts call volume

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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%.

Interested in a visual of the risk/reward dynamics of this and other stock and options action? Open a free virtual trading account today to gain access to tools such as the profit/loss and probability calculators used by professional traders each day.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Options

Referenced Stocks: BP

Jud Pyle

Jud Pyle

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