(NYSE:BP) is down 2.2% to trade at $41.88 this afternoon, as the British oil company begins phase two of its civil trial
in Federal District Court in New Orleans. Furthermore, BP's options volume has ramped up to two times the intraday norm, with about 21,000 calls and 7,400 puts changing hands thus far.
Attracting the majority of attention today is the October 44 call, where more than 6,300 contracts have been exchanged for a volume-weighted average price (VWAP) of $0.12. The majority of the contracts crossed in one swoop, as a block of 4,675 went off the ask price, suggesting it was purchased. In addition, implied volatility increased 3.7 percentage points at the time of the trade, pointing to buy-to-open activity.
By purchasing these out-of-the-money options, today's call buyer anticipates BP will recover from its news-driven drop, and head back into territory last tackled on May 7. Specifically, he expects the stock to topple the breakeven rail of $44.12 (strike price plus the VWAP) by the close on October 18, when front-month options expire. As of now, this call has about a 1-in-8 chance of hurdling into the money during its lifetime, according to its delta of 0.13, or 13%.
Today's traders have also made their way to the November 44 call. Here, nearly all of the 3,325 contracts traded went off at the ask price of $0.41. Plus, implied volatility has ticked higher, which -- along with data from the International Securities Exchange (ISE) -- points to the initiation of long call positions. To make money on their purchases, the buyers need BP to surmount $44.41 by the time back-month options expire on November 15.
Should BP continue to linger below the 44 strike through the respective expirations, today's call buyers stand to lose the initial cash outlay. This was relatively expensive, considering each options sports an elevated implied volatility that's at least 9 percentage points higher than the stock's respective 20-day and 40-day historical (realized) volatilities of 8.2% and 10.2%.
Of note, BP reports third-quarter earnings on October 29, and analysts, on average, are calling for a profit of $1.17 per share. Considering BP's shares jumped 3.3% the week following last year's third-quarter results, perhaps the November call buyers anticipate history will repeat itself, and the stock will see another earnings-induced spike. After last quarter's earnings report, however, BP fell 2.7% in the ensuing week.
This article by Milissa Hudepohl was originally published on Schaeffer's Investment Research.
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