Will BP PLC (ADR) Follow Surging Oil Prices Higher?

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It’s an interesting time for BP PLC (ADR) (NYSE:BP) stock investors. Oil prices have surged more than 140% in the past two years. OPEC remains firm on its production cuts. Tensions are escalating between oil producing giants Saudi Arabia and Iran. And, last but not least, Venezuela’s oil industry is imploding.

When you combine this with rising demand or oil as global economies continue to improve, you have a perfect storm for oil bulls. These developments should also mean improvements for BP’s stock chart. But the fight higher for BP has been a tough one.

Heading into 2018, BP stock looked impressive. The shares were surging off their August lows and topped out near $44 in late January. That’s when President Donald Trump began imposing tariffs. With its main base of operations outside the U.S., BP would feel a pinch from those tariffs and Trump’s America First policies. BP stock went sharply south shortly thereafter.

BP Stock
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But the shares didn’t fall too far. BP held its ground near support at $39. The shares spent all of February and most of March bouncing between $39 and resistance near $40. When news broke earlier this week that China and the U.S. were in discussions to avoid a trade war, BP stock attempted to breakout higher.

That breakout was stymied by resistance from BP’s 50-day moving average and yesterday’s broad-market selloff. Taking both fundamentals and technicals into account, BP stock should be able to move higher from here as trade-war fears settle down … assuming the broader market doesn’t turn bear.

Checking in with sentiment, analysts are divided on BP stock.  According to Thomson/First Call, five of the 10 brokerage firms offering up an opinion on BP stock rate the shares a “hold” or worse.  The 12-month consensus price target rests at $44.64, a premium of about 11.7% from BP stock’s current perch.

BP stock options traders, meanwhile, are heavily bullish on the shares. The front-month April put/call open interest ratio has fallen to a reading of 0.32 in the past month. This reading is at a near-term low and indicates that calls are more than three times as popular as puts among front-month options.

Overall, April implieds are pricing in a potential move of about 4.2% heading into expiration. This places the upper bound at $41.70, while the lower bound rests at $38.30.

2 Trades for BP Stock

Put Spread: Rising oil prices are battling with threats of a U.S./China trade war on the sentiment front. This situation is likely to continue for some time, resulting in a return to range-bound trading for BP stock. Traders looking to profit from little to no movement from BP stock might want to consider an April $37 put sell. At last check, this put was bid at 21 cents, or $21 per contract.

As with all put sells, traders will keep the premium received for entering the trade as long as BP stock trades above $37 through April expiration.  If BP were to trade below $37 prior to expiration, then you could be assigned 100 shares per contract sold at a cost of $37 per share.

Call Spread: Those traders looking to bet on a bullish breakout for BP stock might want to consider an April $41/$42 bull call spread. At last check, this spread was offered at 19 cents, or $19 per pair of contracts.  Breakeven lies at $41.19, while a maximum profit of 81 cents, or $81 per pair of contracts, is possible if BP stock closes at or above $42 when April options expire.

While the maximum potential return in roughly 320% on this position, traders should consider taking profits on a double, or 100% gain. This should occur about when BP stock trades above $41.40. Given BP stock’s lack of strong price action, I’m not convinced the stock will break north of $42 before these options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/bp-plc-adr-surging-oil-prices-higher/.

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