It's no secret that oil prices are in a slump. With rising demand for alternative energy sources across the globe, and OPEC unable to stem the global oil supply glut, the prognosis isn't good for a significant recovery anytime soon. Furthermore, this spells trouble for oil and gas firms, even those outperforming companies like BP plc (ADR) (NYSE: BP ).
Click to Enlarge Technically speaking, BP has an edge on energy sector leader Exxon Mobil Corporation (NYSE: XOM ), but given XOM's poor price action, that's nothing to brag about. Year-to-date, BP is down nearly 7% compared to XOM's loss of roughly 11%.
Both are outperforming the struggling Energy Select Sector SPDR (ETF) (NYSEARCA: XLE ), which has plunged almost 15% since the start of 2017.
BP stock has a mid-May bounce to thank for its current strength versus the rest of the sector. The shares looked on the verge of parlaying that price action into a longer rally, but the recent collapse in oil prices scuttled those hopes rather quickly.
What's more, natural gas prices haven't been a friend either, and BP is writing down $750 million on an Angola natural gas discovery because it isn't commercially viable.
However, is it really time to give up bullish hope on BP stock?
BP's sentiment backdrop offers a smidgen of hope. Checking in with Thomson/First Call, seven of the 10 analysts following BP stock rate the shares a "hold." The lack of "sell" ratings is a bit of a concern, but BP has shown that it can outperform its peers. Furthermore, BP has shown it can navigate the current energy environment with agility, and that could earn it an upgrade down the road..
Meanwhile, BP options traders are surprisingly upbeat. Currently, the July put/call open interest ratio rests at a rather bullish reading of 0.57, with calls on the verge of doubling puts among front-month options. Furthermore, peak call OI totals some 14,000 contracts at the out-of-the-money $37 strike.
And this influx of calls doesn't appear to be tied to short selling hedges either. In fact, the number of BP stock shares sold short declined by 15% during the most recent reporting period, standing in stark contrast to rising short interest on XOM and the rest of the energy sector.
Returning to BP options, July implieds are pricing in a potential move of about 2.91% heading into expiration. This places the upper bound at $36.02, while the lower bound rests at $34. The $34 region has long been a stalwart support level for BP, and, barring any major developments, it should continue to hold. A breakout above $36, however, could be a bullish signal for BP, one that maybe short sellers are already keeping a close eye on.
2 Trades for BP Stock
Put Spread: With solid technical support below the shares, and BP stock holding up remarkably well against its sector peers, it's almost tempting to bet bullish on the stock. However, with a lack of drivers to push BP higher, a neutral position may be the best play in BP options. Traders looking to bet on support might want to consider a July $34 put sell. At last check, this put was bid at 20 cents, or $20 per contract.
As with all put sells, traders will keep the premium received for entering the trade as long as BP stock trades above $34 through July expiration. If BP were to trade below $34 prior to expiration, then you could be assigned 100 shares per contract sold at a cost of $34 per share.
Call Spread: Those traders looking to give in to temptation and bet bullish on BP stock might want to consider a July $35/$36 bull call spread. At last check, this spread was offered at 36 cents, or $36 per pair of contracts. Breakeven lies at $35.36, while a maximum profit of 64 cents, or $64 per pair of contracts, is possible if BP stock closes at or above $36 when July options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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