Interesting BP Put Options For July 25th

Investors interested in BP shares may find selling a $28.00 strike price put option attractive, as the current bid is $0.54, potentially lowering the cost basis to $27.46. With a 62% chance of expiring worthless, this contract offers a potential 1.93% return on the cash commitment, or 14.08% annualized, though this is contingent on BP's price remaining above $28.00. The implied volatility of the put contract is 50%, while the actual trailing twelve-month volatility is 29%.

Analysis

The article details an options strategy for BP PLC (BP), specifically the selling of a put contract with a $28.00 strike price, which currently bids at $0.54. This approach offers investors interested in acquiring BP shares an alternative to direct market purchase, potentially establishing a lower cost basis of $27.46 per share, compared to the current market price of $29.05. The $28.00 strike is approximately 4% out-of-the-money, and analytical data indicates a 62% probability of this put contract expiring worthless. If the option expires without being exercised, the collected premium would represent a 1.93% return on the cash commitment, or an annualized yield of 14.08%, termed 'YieldBoost'. A significant observation is the disparity between the put contract's implied volatility of 50% and BP's actual trailing twelve-month historical volatility of 29%, suggesting that the option premium is relatively elevated compared to the stock's recent price fluctuations, a condition generally favorable for option sellers.

Key Decisions for Investors

• Investors bullish on BP or seeking to acquire its shares at a discount to the current $29.05 price could consider selling the $28.00 strike put option, which offers a potential entry point at an effective cost of $27.46 or a 14.08% annualized return on collateral if the option expires worthless.
• The elevated implied volatility of 50% relative to historical volatility of 29% suggests that option premiums are currently rich, potentially benefiting sellers; however, this strategy includes the obligation to purchase BP shares at $28.00 if the stock price falls below this strike by expiration.
• Before executing such a trade, investors should assess their conviction in BP's price remaining above $28.00 and their willingness to own the stock at an effective price of $27.46, weighing the stated 62% probability of the option expiring worthless against their fundamental outlook and risk tolerance.