Market Volatility Fueling BP Share Price

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With countries across the world continuing to print money, real assets are going to be in demand. Stutland Volatility Group remains overweight oil stocks, and one stock we like in the short term is BP (NYSE:BP). BP is still one of the largest companies in the world, and it’s slowly starting to move on from the 2010 Gulf Coast oil spill.

In the broader markets, volatility expectations remain high due to the market turmoil coming out of Europe and also because of the MF Global bankruptcy, which is causing erratic trading.

This high volatility is unusual heading into December and January. Typically, those two months are filled with vacation days and are usually months in which we see the Volatility Index (CBOE:VIX) in the low 20s (not the low 30s, where it’s been trading for much of the past few months).

While BP is trading at $44, right now is a good time to take advantage of this volatility by owning the stock and selling call options against it for some instant income. Selling a call at the $46 strike would afford us some wiggle room to the downside, and builds in an exit point on where to get out of the long shares.

We recommend selling the December call on this trade because, if the stock fails to trade above $46 before December, then we can roll the option out and sell the January call as we close in on December expiration.

If BP trades above $46 before December expiration, then we have effectively sold the stock for $47.  Back in July, BP traded as high as $47.09, which is where we want to exit our long BP position.

Fundamentally BP could go much higher, but technically this is a pivot point — a point where people who bought the high can get out for breakeven, and also a point where other technical traders will be exiting their trades.

This strategy also works in a sideways market, and the oil sector is looking strong right now.  As part of an actively managed portfolio, buy-writing (i.e., entering a covered call position in one trade) adds premium and reduces volatility and should be a staple in any portfolio, especially for those approaching retirement.

Here’s a quick trade summary:

Stock/Index: Bp

Stock Price:  $44

Next Estimated Earnings: April

Option Play: Bp Dec 46 Buy-Write

Making the Trade — Buy: BP Stock at $44

Making the Trade — Sell: Dec 46 Call at $1

Net Cost: $43 ($44 share price – $1 option premium collected)

Downside Breakeven: BP Stock at $43

Max Profit: $3

Max Loss: $43.00

Call Away % Return: 6.8%


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