New Trade Alert for (BP)
British Petroleum January $28.00 Call @$5.75 or less
Risk Rating: 3.5 (1 = lowest 5 = highest)
Above Break Even Probability: 46%
The power of options was evident in the two month +67% BP trade exited July 1st. The objective was met on a textbook trade to profit profusely on a modest move in the stock
British Petroleum is again a buy as it is at a base…
A Crude Oil correction from $50 a barrel to under $40 has hurt energy stocks in the short term. Technically Crude is barely back in bear market territory with the sharp selloff near the halfway support level for 2016.
Risk reward favors Bulls at these discounted levels.
A Dollar downturn has not helped Oil yet… though Gold has marched to highs. Remember that Gold led the commodity reversal rally to start the New Year.
British Petroleum is still down 10% in the last year of trade.
BP tracked between $28 and $36 for a year with the present pullback to the $32 midpoint of the sideways range.
The first target stands 10% above at the $36 channel top. A $40 larger objective is that $4 trading range on top of the highs
A close below the $30 on a weekly basis would negate this bullish buying premise.
The Options Way: Unlimited Upside Potential with Limited Risk.
A BP long call option can provide the staying power for a market upturn. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months and strikes. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security.
It is important to buy options that payoff from only a modest price move. There is no need to ONLY make money on the all but infrequent large price explosion.
Any trade has a fifty/fifty chance of success. Buying options ITM options increase that probability.
That Delta also approximates the odds that the option will be In The Money at expiration.
Buying better options are more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With BP trading at $32.70, for example, an In The Money $28.00 strike option currently has $4.70 in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right but only after the option has expired premature to the market move.
Trade Setup: I recommend the BP January $28 Call at $5.75 or less.
This option strike gives you the right to buy the shares at $28.00 per share, just above the EXTREME multi year lows with absolutely limited risk.
The January option has nearly six months for BULLISH development. An 82 Delta on this strike means the option will behave much like the stock.
The maximum loss is limited to the $575 or less paid per option contract. A stop loss at half of premium paid reduces the dollar exposure. The upside is unlimited.
The BP option trade break even is $33.75 at expiration ($28.00 strike plus $5.75 or less option premium). That is just one dollar above the current price.
The modest $36 top of range objective is 10% above. At that stock price level the option investment would gain more 50% to $8.00 plus.