Bullish on BP? Then I Have a Trade for You

• Posted by Greg Harmon
• on July 1st, 2014

BP ($BP) has been a favorite stock of mine since it moved out of a tightening range late last year. I put on a bullish Risk Reversal trade for customers at the time and just took it off two weeks ago for a good profit when it started to pullback. But if you look at the chart below it seems that the stock can continue to the upside for a while more if it can get through the current resistance from early 2010. The top at 60 would then be with in reach. With the RSI and MACD rising along with the moving averages it is a pretty good probability over the next several months.

One way to participate in this move without the horrors of being shaken out on a downturn is with options. In fact the same structure that I used on this stock last year can be traded again. With a lot of activity recently between 47 and 49 and then support at 45 below, consider a January 2016 45/55 Bullish Risk Reversal. This trade is buying a January 2016 Expiry 55 Call and selling the same Expiry 45 Put. Today this trade costs less than 25 cents to put on. I have an order to buy it if it falls to a credit. On the risk front the trade takes margin, worst case for an IRA the full $45 price per contract, and exposes you to downside risk under the 45 price. The combination has about a 63 delta though so an upside price move will start making money fast. And with 18 months for this to play out you have a lot of time. But if it hits 60 in August and stalls, by all means take it off then. Maybe it will pullback then and give you another shot at the same trade.

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