Archives

Flash Alert: Sell This Put Before U.S. Markets Wake Up to OPEC’s Decision

By Jim Nelson, Editor, Bonner & Partners on November 28, 2014

First of all, we hope you had a wonderful Thanksgiving. We certainly did. But that doesn’t stop global markets. And today, we have a huge opportunity for you…

As we noted last Sunday, Thanksgiving had markets closed in the U.S., but that doesn’t mean everything was shut down. OPEC – Organization of the Petroleum Exporting Countries – met to decide whether the recent slump in oil prices should be counteracted with production cuts. Turns out, they didn’t.

While we were sitting down to our turkey dinners yesterday, the group released this simple statement: “…the Conference decided to maintain the production level of 30.0 mb/d.” Meaning, the most powerful force in the global oil market decided to do nothing.

We told you that if the group did cut production, we should see a spike in oil prices. Likewise, if no production cut was announced, oil prices would temporarily react in the opposite manner. That’s exactly what’s happened.

As we write, oil is sitting at just $69 per barrel. That’s the lowest it’s been since 2010. And if you have been following us for the past few weeks, it’s our opinion that this is an absurd level.

Even OPEC, in its announcement that it isn’t cutting production, it cited the rising amount of new tight oil and shale oil supply coming online. But that new production just costs too much to continue if end-prices don’t rise from here.

So we believe this is going to be a temporary fall for oil. And now’s the time to get into our favorite income-producing way to play it.

Earlier this month, our BP plc (NYSE:BP) puts expired without being exercised. Today, with this news-driven decline in oil prices, we recommend you sell-to-open a new round of puts on BP.

There are two main factors to consider with today’s trade. Not only has oil slipped below any sane person’s price point, the post-holiday trading session has far fewer traders. Meaning, there’s less volume and more price variation. So we’re seeing option prices right now that are completely out of sync. We’re going to take advantage.

Now, before we get into our recommendation, consider this. BP was cheap at $42, when we told you to sell puts the first time, back in October. But we wanted to lock in an even lower price of $40 per share. So we recommended you sell puts with a $40 strike price.

Today, we have a chance to sell puts with a $38 strike price… meaning, we’re able to collect double-digit income while waiting for an even better entry price on BP shares.

As we write, the January 2015 $38 BP puts are going for 56 cents per share, or $56 per contract. Based on the $3,800 per contract you’ll need to keep in your account until expiration day on January 16, that’s a 1.5% return on capital in just one-and-a-half months. Annualized, that works out to a 11% income yield.

As always, there are only three outcomes from here:

1. Shares of BP bounce back. In this scenario, your puts will expire without being exercised. The $56 per contract you sell will be yours to keep. Congrats on locking in a year’s worth of income in just under two months.

2. Shares stay right where they are. Here, we’re in perfect shape. This is pretty much what happened last time. And with this second put, you have now locked in a total of $156 per contract in income, without ever owning shares. Better still, you’ll be able to sell another put option in late January.

3. Shares fall further. This is the only way you’d ever have to buy shares. In this scenario, your broker would take the $3,800 in your account and purchase 100 shares for BP. At $38 per share, you’re sitting on a stock that is almost certainly one of the cheapest equities in the world. And you can begin selling covered calls at that point. What’s even better… you have already collected $156 per share through the two puts. So your cost basis, in this scenario, is just $36.44 per share. Think about that. Just a month ago, these shares were at $42. And even THAT was cheap!

This is a great, news-driven, holiday-trading-session play. Ultimately, it doesn’t matter which direction BP shares head over the next two months, you’ll still be sitting pretty.

Action to take: Sell-to-open January 2015 $38 BP puts for no less than 50 cents per share, or $50 per contract. You’ll need to keep $3,800 in your brokerage account for the duration of this put contract. As always, use a limit order.

That’s it for today. We’ll write again on Sunday.

We’d love to hear your thoughts about this play and anything else you have on your mind. As always, send us your email at legacytrader@members.bonnerandpartners.com…

Or you can reach us on Facebook… or Twitter…

Sincerely,

JimNelsonsig kellysig

Jim Nelson and Kelly Green

P.S. Note that markets close today at 1 p.m. (EST). So be sure to get into this play before then.

P.P.S. As a reader, Alan, pointed out, we made a mistake in last Sunday’s update. We told you to be sure you own 100 shares of Freeport-McMoRan Inc (NYSE:FCX) for every January $28 FCX put contract you sell. That’s a bad habit from our B&P Platinum service. We should have written to be sure to keep $2,800 in your account for every contract you sell.

Remember, with puts, we are looking for an entry price. So we don’t yet own shares of the underlying company. We apologize for the confusion and thank Alan for pointing it out.

©  Bonner & Partners, 55 NE 5th Avenue Suite 100, Delray Beach, FL 33483, USA. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from the publisher.

Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. It is not designed to meet your personal financial situation – we are not investment advisors nor do we give personalized investment advice. The opinions expressed herein are those of the publisher and are subject to change without notice. It may become outdated and there is no obligation to update any such information.

Investments recommended in our publications should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company in question. You shouldn't make any financial decision based solely on what you read here. 

Bonner & Partners writers and publications do not take compensation in any form for covering those securities or commodities.

Bonner & Partners expressly forbids its writers from owning or having a financial interest in any security that they recommend to their readers. Furthermore, all other employees and agents of Bonner & Partners and its affiliate companies must wait 24 hours before following an initial recommendation published on the Internet, or 72 hours after a printed publication is mailed.