OPTIONS REPORT: Confidence in BP and Halliburton

11th Jun 2010 20:30

By Brendan Conway Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--As investors grew more confident that BP PLC can endure the fallout from the Gulf of Mexico oil spill, one big options trader showed up to suggest a belief that the direst predictions for the company won't prove true. Ending a week during which government officials ratcheted up the pressure on BP and at least one professional investor speculated that the company could face bankruptcy, the stock rose 2.8% to $33.68 Friday. Among the day's optimists were Goldman Sachs analysts, who said in a client note that "BP shares now have as much upside potential as the rest of the European integrated oil sector." Early in the session, an optimistic trader appeared to sell puts on BP's shares that don't expire until January, a position which suggests confidence, said OptionsHouse Chief Investment Strategist Steve Claussen. Investors typically buy puts to protect themselves against declines in a stock. But selling a put signals confidence that the stock won't drop below certain levels, as well as a willingness to buy the stock at that level. The trader pockets the contract's premium and keeps it as long as the stock doesn't drop. In this case, the investor sold several thousand January $20 BP puts. At afternoon prices, a trader employing the same strategy pockets the $2.40 premium. The trader must also be willing to own BP shares if they trade anywhere below $20 at any point in 2010. "This exudes some confidence in the company and in the situation getting better, not worse--the idea that maybe this is a little ridiculous, the company is not going away," Claussen said. Overall, Friday's BP options trading skewed toward puts over calls that give the right to buy the stock, with investors picking up 147,000 puts compared to 110,000 calls, according to Track Data. An investor also cast what looked like a vote of confidence in Halliburton Co., another company whose stock has taken a beating during the Gulf crisis. The trader in Halliburton executed what appeared to be a two-by-one put spread, selling two $22.50 July puts for every $26 put purchased, Claussen said. In so doing, the trader is able to offset the cost of the second contract by taking in the premium for the first two. At an afternoon premium of $2.59, a holder of the $26 contract is protected if Halliburton's stock drops beneath $23.41 by July 16. The trader loses money if the stock falls. "You would only be willing to do this trade if you thought there was no chance or little chance of Halliburton moving below the $19 range," Claussen said. Elsewhere, the options market played host to moderately optimistic trades in stocks tied to consumer spending on a day of disappointment in May's retail-sales figures. Consumer stocks were the day's worst performers in the S&P 500, leading the index to modest losses and outweighing gains in technology and materials stocks. But options traders played the contrarian, showing a strong preference for bullish contracts in Visa Inc., picking up nearly 24,000 calls compared to 9,900 puts. Notable trades included more than 3,100 contracts in Visa's $90 December calls, where the action rose to nearly three times the open interest. At a premium of $2.33, the contracts make money if Visa shares rise above $92.33 by Dec. 17. The stock dropped 2.5% to $75.55 in mid-afternoon trading. Traders also focused on videogame retailer GameStop Corp., picking up 8,700 calls compared to 1,600 puts. The activity was especially strong in the company's near-term June $22 calls. At an afternoon premium of 29 cents, the contracts make money if GameStop rises above $22.29 by June 18. The stock gained 1.1% to $21.46 in mid-afternoon trading. In drug-store giant Walgreen Co., whose stock dropped in the last week as a closely watched pharmacy agreement with CVS Caremark Corp. imploded, investors traded more than 14,000 calls compared to 7,600 puts. There was notable action in Walgreen's July $32 calls. At a premium of 32 cents, the contracts are in the black if Walgreen's shares exceed $32.32 by July 16. -By Brendan Conway, Dow Jones Newswires; 212-416-2670; [email protected] (END) Dow Jones Newswires June 11, 2010 15:30 ET (19:30 GMT)