OPTIONS REPORT: Traders Prep For Swings In BP Stock

10th Jun 2010 20:30

By Donna Kardos Yesalavich and Kristina Peterson Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--BP PLC (BP) options experienced heavy trading volume Thursday as investors anticipated continued volatility thanks to the uncertainty surrounding the company's liabilities from the Gulf of Mexico oil spill. The action appeared to be mixed, with activity elevated in both puts, which convey the right to sell a company's stock, and calls, which convey the right to buy a company's stock. On the call side, investors gravitated toward June $35 calls, paying 76 cents for contracts that would make money if the stock rises above $35.76 before expiration on June 18. The shares recently traded at $32, rising 9.6%, although they are still down more than 40% from where they traded before the oil spill began in April. On the put side, volume was elevated in June $30 puts priced at $1.65 that would make money if the stock falls below 28.35. In addition, positions were added in June $12.50 puts at a price of 37 cents that make money if the stock falls below $12.13. There was also activity in July $5 puts and July $2.50 puts, as traders tried to add protection in the event that BP has to file for bankruptcy. Still, the contracts for them are so cheap, they are considered along the lines of a lottery ticket. "The people buying the way out-of-the-money puts were playing those for bankruptcy," said Michael Schwartz, chief options strategist at Oppenheimer. The possibility of bankruptcy was raised by an energy specialist earlier this week. "They're putting up the least amount of money for the biggest return," he added. Still, Schwartz said the bulk of the increased volume in the BP options came from investors betting that the stock would continue to be volatile, expecting that any sharp drops could be followed by large gains. Thursday's stock gains in BP, which erased some of the previous day's sharp losses, came as fears eased about the British oil giant's ability to withstand the expense of the Gulf of Mexico oil-spill recovery. Wednesday, U.S. lawmakers ratcheted up demands that BP cover all costs related to the spill. Meanwhile, an increasing number of members of Congress are putting pressure on BP to suspend its dividend payments. However, a Justice Department official said Thursday that the agency isn't preparing to seek an injunction that would block BP from paying dividends to shareholders. Elsewhere in options, traders appeared to be selling low-priced puts in International Game Technology (IGT) and Dow Chemical Co. (DOW), a low-risk bet that the stocks will be able to stay above certain levels. Trading activity in International Game centered on July $15 puts, where a big block of cheap puts were sold as investors looked to take a small profit without much risk, betting that the company will remain above $15 until July 16. The puts, first sold for a dime each, then later sold for a nickel, will turn a profit if International Game stays above $14.95 before July 16. Shares of International Game were recently trading up 3.9% to $19.03. Investors said the sale was a low-risk bet for a small profit. "They're willing to collect that dime, and even though it's a low-dollar and low-percent return, it's still better than investing in Treasury bonds," said Jud Pyle, chief investment strategist of Peak6 Investments. Meanwhile, traders appeared to be selling a large block of July $20 puts in Dow Chemical. At 19 cents each, the puts will be profitable if Dow Chemical stays above $19.81 before July 16. Shares of Dow Chemical were recently trading up 2.9% at $26.16. -By Donna Kardos Yesalavich, Dow Jones Newswires; 212-416-2188; [email protected] (END) Dow Jones Newswires June 10, 2010 15:30 ET (19:30 GMT)