BP plc (BP) Faces a Tough Challenge at the $40 Level

BP plc (ADR) (BP) is staring down options- and trendline-related resistance ahead of January expiration

by Celeste Taylor

Published on Jan 13, 2017 at 12:58 PM
Updated on Jun 24, 2020 at 10:16 AM

Shares of oil major BP plc (ADR) (NYSE:BP) have been on a tear higher in recent weeks, jumping more than 16% from their mid-November lows around $32.50. However, the oil-and-gas stock may have its work cut out for it if it wants to extend its lead any higher. Ahead of next week's January options expiration, BP is staring down potentially stiff resistance in the $40 neighborhood.

Specifically, Schaeffer's put/call open interest ratio (SOIR) of 0.58 registers in the 24th annual percentile, indicating near-term option players are more call-heavy than usual. In fact, six of BP's top 10 open interest positions are front-month calls, set to expire next Friday, Jan. 20. And leading these positions is the January 2017 40-strike call, which is currently out of the money.

Going into expiration week, this large amount of overhead call open interest could pose a potential problem for BP shares. Given that peak open interest currently lies at the overhead 40 strike, this area could exert options-related resistance to squash BP's run higher. There are 37,082 contracts in residence at the January 40 call, which is equivalent to 3.7 million shares. Based on the 10-day moving average of BP's trading volume, which is 5.7 million shares, this heavy accumulation of out-of-the-money calls accounts for 65.5% of BP's average daily trading volume -- an amount significant enough that the unwinding of hedges related to this call open interest could certainly keep a lid on the shares as expiration draws closer.

So far today, BP has traded on both sides of breakeven, and currently sits 0.1% higher at $37.80. The stock has stair-stepped its way to a 22% year-over-year gain, and notched an annual high just last week, before retreating back to its 20-day moving average.

But potential options-related resistance is not the only problem BP plc (ADR) (NYSE:BP) faces in its journey higher. Its 160-week moving average is also near the round $40 mark, currently perched at $39.21. This trendline has worked against the shares in the past, previously capping BP's 2015 highs. As a result, the prospects for additional short-term upside from BP look extremely limited.

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