BP p.l.c. (BP)

Update 2/27/2017: BP fell for a week after earnings were published, and then zig-zagged sideways. The declined in volatility and time decay did their work, and I was able to exit for a profit at 25.2% of maximum potential profit, slightly above my 25% target..

Shares fell by 4.8% over 21 days, or an 84% annual rate. The options position produced a 33.6% yield on debit for a +584% annual rate.

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BP publishes earnings on Tuesday before the opening bell.

I shall use the MAR series of options, which trades for the last time 39 days hence, on March 17.

Implied volatility stands at 22%, which is 1.9 times the VIX, a measure of the volatility of the S&P 500 index.

BP’s IV stands in the 55th percentile of its annual range and the 11th percentile of its most recent broad movement.

The price used for analysis was $35.76.

Premium:	$1.63	MAR	iron fly
BP		Odds	Delta
Calls
Long	38.00	88.6%	13
Break-even	36.63
Short	35.00	41.1%	63
Puts
Short	35.00	56.5%	40
Break-even	33.37
Long	32.00	89.5%	9

The premium is 54% of the width of the position’s wings.

The risk/reward ratio is 0.8:1.

Decision for My Account

The difficulty with BP was the options grid. the $32 put strike has open interest of 73 contracts. My rule of thumb for such liquidity that way is triple digits or better. None the less, the bid/ask spread for the at-the-money call option is only 4 cents, so I bent my rules a bit to take the trade.

The stock at the time of entry was priced at $35.75.

By Tim Bovee, Portland, Oregon, Feb. 6, 2017