Unusual Options Activity: BP (BP)

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  • At least one trader is betting that oil giant BP (BP) will head higher despite reporting its fifth-quarterly loss in a row on Tuesday. The trader bought the December 18th $15 call options, expiring in 51-days. The options are about $0.50 in-the-money and should move penny-for-penny higher with shares.

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  • The options saw over 10,700 contracts trade against a prior open interest of 432, a 25-fold rise in volume on the trade. The option buyer paid about $1.20 for the contract.

    With the option already in-the-money, just over half the option’s value is in time premium, which will go to zero. However, if shares can trade over $16.20 at expiration, the option buyer will make a profit.

    Action to take: The oil sector is heavily oversold, but rightly so. Demand is down, as are profit margins across the sector. The space will likely have some bounces higher. However, the company’s earnings miss has sent shares to a fresh 52-week low, and the trend is clearly down.

    Even with those caveats, traders may want to trade this option, for several reasons. First, it’s already in-the-money, which offers some downside protection from a total wipeout. Second, with a bounce, traders can grab a quick profit and then switch to put options once shares are less oversold. Traders should look for a quick bounce with mid-to-high double-digit returns before taking a profit with this trade.

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