BP plc (BP: sentiment, chart, options) attracted heavy put volume on Monday, with activity ramping up to 1.76 times the usual level. During the course of the session, traders on the International Securities Exchange (ISE) bought to open 3,068 puts on the oil major, compared to just 569 calls. In other words, puts were 5.39 times more popular than calls yesterday.
In fact, speculators on the ISE have rarely shown a greater appetite for put options on BP. The security's 10-day ISE put/call volume ratio weighs in at 1.75, in the 97th annual percentile. This elevated reading indicates that traders on this exchange have purchased bearish bets over bullish at a faster pace only 3% of the time during the previous year.
Likewise, BP's Schaeffer's put/call open interest ratio (SOIR) is also pointing to heavy pessimism. The stock's SOIR arrived today at 0.80, which ranks higher than 81% of other such readings taken during the past 52 weeks. In other words, short-term option players have been more skeptically aligned toward the shares just 19% of the time.
In the front-month series of options, the 55 strike is home to peak call and put open interest. The October 55 call has 19,248 contracts outstanding, while the October 55 put has 5,490 contracts in residence. BP is currently trading near $53.60, which means that traders are favoring out-of-the-money calls and in-the-money puts.
Although there's a predominant bearish bias among near-term option traders, that glut of overhead call open interest could cause trouble during the coming weeks. As expiration draws closer, BP could encounter options-related resistance at the 55 strike.
As it so happens, at least one trader is expecting stagnation from BP during the short term. Taking a closer look at Monday's option volume, there appears to be a short strangle buried among the heavy put activity.
Specifically, three blocks totaling 2,019 contracts traded on both BP's November 55 call and November 50 put shortly after the open on Monday. These symmetrical blocks were marked "spread," and most of them traded between the bid and ask prices -- but a few traded closer to the bid price, suggesting that these calls and puts were sold.
This theory is supported by the fact that BP was trading squarely between the two strikes when the position was initiated. In a short strangle, the trader is looking for the underlying stock to remain pinned between the sold put and call strikes through expiration. Both options will then expire worthless, allowing the speculator to retain the initial premium received as his or her maximum profit.
In other words, it looks as though Monday's short strangle player is calling a top to BP's modest intermediate-term uptrend. The stock has added 14.6% in 2009, falling just slightly short of the S&P 500 Index's (SPX) gain of 17.5% for the same time frame.
The equity's ascent has been underlined by its 10-week and 20-week moving averages since May. These two trendlines have offered reliable double-barreled support for BP, containing all of the stock's weekly closes in the intervening months.
However, the shares have recently shied away from the $55 level and turned lower. Apparently, yesterday's short strangle trade was a bet that BP will continue to find resistance in this neighborhood during the next couple of months. Meanwhile, support from the stock's 80-day moving average is located just north of $50, providing a backstop for the lower rail of the short strangle position.
While the prospects look solid for a pullback to the lower 50s, it's unclear whether BP will remain pinned beneath $55 through November expiration -- heavy call open interest at the October 55 strike could keep a lid on the equity's progress throughout the middle of next month, but open interest at this strike is comparatively quite thin in the November series.
Most troubling is the fact that BP is due to report earnings on Oct. 27, which could prompt a major movement in the shares. As it stands now, any short strangle speculation on BP would probably be best limited to the October series.
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