Sponsored By:

BP (BP)

October 13, 2008

Dear Fellow Options Trader,

Natural gas producer Chesapeake Energy (CHK) sold a 25% interest in its Fayetteville Shale for $1.9 billion to BP (BP) at the beginning of September. Back then, BP was trading for $54 and Chesapeake was trading at around $45.

Given how severely CHK has fallen, closing at $16.52 Friday, I’m thinking BP could have struck a much better deal had it waited, but that ship has sailed.

BP averaged just 5,000 call contracts per day in the previous 30 days, but has traded some 33,000 calls thus far today. The bulk of the volume has come from a large trade that rolled down nearly 14,000 calls from the BP Jan 60 calls to the BP Jan 45 calls.

In rough terms they sold those BP Jan 60 calls for 48 cents and bought the BP Jan 45 calls for $3.50, for a net debit of $3.02. The last time BP was in the $40s was early 2004 and back then crude oil was between $37 and $40 per barrel!

We see at least two ways to play a further bounce from BP with two bull-call spreads:

We’d consider buying the BP Jan 45 Calls (BPAI) for approximately $4.30 and at the same time selling an equal number of the BP Jan 50 Call (BPAJ) for approximately $2.40 for a net debit of $1.90 or less.

Or you can buy the BP Jan 50 Calls (BPAJ) for approximately $2.40 and simultaneously sell a like number of the BP Jan 55 Calls (BPAK) for approximately $1.30 for a net debit of $1.10 or less.

The BP Jan 45-50 bull-call spread has better odds, but it is a more expensive investment, while the BP Jan 50-55 spread has great reward/risk profile.

Either way, remember the exact prices you pay for each leg of the trade don't matter, provided you adhere to the net debit price limits.

Good luck and good trading!


Jon "Doctor J" Najarian
Editor
ChangeWave Options Trader