BP plc (ADR) (NYSE:BP) is posed for a rise in the stock price, so what could be the best option play with the oil and gas company? Recently on Bloomberg, Chief Options Strategist Alan Knuckman of Barchart Bulls-Eye Options, discussed his options strategy for BP plc (ADR) (NYSE:BP) with Scarlet Fu.
Knuckman suggested buying April $40 calls, which cost $6.75 for the underlying BP plc (ADR) (NYSE:BP) stock, which was trading at $45.94 at the market close on Friday, was the right play. This makes the options just about $0.8 away from their break-even point at $46.75. Moreover, the seven-month period is sufficient for BP plc (ADR) (NYSE:BP)’s stock price to gain value and hence make this strategy a profitable bet.
The core of the strategy is of course the belief that BP plc (ADR) (NYSE:BP) is currently undervalued. Knuckman explained that BP is down about 15% from its June highs. He said that the company has been trying to sort out the mess that was created because of the Deepwater Horizon oil spill which had serious consequences for BP plc (ADR) (NYSE:BP) in terms of financial, public relations and legal burdens. However, in light of the recent court ruling, BP can finally put this accident behind it and move on.
Another, very pertinent, reason as to why a rally in the BP stock is expected is the current levels of the oil market, which are set to witness a hike in the near future. Oil prices made a new low just recently but managed to close higher Knuckman considers that the market will be able to build up on this reversal. Additionally, the $90 mark around which the current oil prices are trading is a key support to lean on as it is the mid-point of oil prices for the last 5 years ($65 to $115).
Knuckman, further explained a possible 15% upside move that could be seen in the Energy Select Sector SPDR (ETF) as it was down to $94 and should most probably retrace as it has for the last five years, when it reached this level.