By Jud Pyle, CFA, chief investment strategist for the Options News Network
NEW YORK (
has obviously been the topic of much discussion since the tragic accident in the Gulf of Mexico on April 20. Since that time, shares of the company have fallen by more than 15%. The bear case for this selloff has been that the legal and clean up bills that BP could face will be massive enough to hurt earnings substantially.
Even as the broad market is selling off today, and shares of other major oil players are down more than 2.5%, BP shares are bucking the trend and rallying. At around 2:00 PM EST, BP shares were up 90 cents to $51. In the options marketplace, we see that at least one investor expressed moderate bullishness on the company by purchasing a call ratio spread.
At around 11:13 EST, an investor bought 20,000 Oct. 55 calls for $2.34 per contract and simultaneously sold twice as many Oct. 60 calls for $1.06 per contract to pay 22 cents per ratio spread. In this call one-by-two, investors will make a maximum profit of $4.78 per spread if BP shares close at $60 at Oct. options expiration. If BP shares stay below $55.22 (the breakeven price), investors cap their losses at 22 cents per spread. However, this trade is only moderately bullish because investors incur unlimited losses if BP shares rally higher than $64.78.
Another interesting thing about this trade is that it is "short vega." This means the spread will increase in value if implied volatility were to decline. As you can see from the spike in the CBOE Market Volatility Index (VIX) today, implied volatility throughout the market is on the rise. But this one-by-two buyer is willing to bet that implied volatility in BP could have seen its peak since the crisis began. By way of example, the implied volatility for this Oct. 60 call today is roughly 31%. As recently as April 23, implied volatility of at-the-money options in October was closer to 23%. This trade will benefit even if the stock stays around $51, but implied volatility declines back toward the 23% level.
Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.
Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."