The Long-Term Picture For BP

By Jim Nelson, Editor, Bonner & Partners on November 10, 2014

This week was relatively quiet. On Tuesday, U.S. voters decided to hand the Senate over to Republicans. But with a Democrat – with his veto and executive order powers – nothing changes there. Washington will be just as gridlocked as ever… for at least another two years.

Meanwhile, the stock market repeated last week’s performance, climbing another percentage point across the board.

The only interesting news affecting our investments came from the catalyst we mentioned in your Oct. 20 update: the release of OPEC’s World Oil Outlook for 2014.

In it, there were few surprises to previous outlooks… especially on oil. But it did point out just how important – and evolving – the gas market is right now…

We want to point you towards two charts. The first shows natural gas demand over the last 53 years:

gas 63-2013


As you can see, developed markets – the faint, pink line labeled OECD, which stands for the Organization for Economic Co-operation and Development – have led demand for natural gas. That’s starting to change. And, as you can see in this second chart – gas demand estimates from 2000 to 2040 – it’s countries like China, India and Brazil where we’re going to see consumption skyrocket.

gas 2000-2040


Natural gas is one of our favorite long-term themes. And even though you probably think of our BP plc (NYSE:BP) play as an oil stock, it too has a hand in this huge future.

Last year, BP averaged 5.8 billion cubic feet of natural gas production per day. That’s the equivalent of what California uses each day. Only Texas uses more natural gas.

For BP, that production is only going to go up. It has stakes in the Eagle Ford, Anadarko and Fayetteville shale basins – three of the fastest-growing gas producing basins in the U.S.

It’s still too early to say. But if nothing happens right now, it doesn’t look like we’ll have shares of BP put to us. But with the size of option premiums always a bit higher for BP, and our outlook for its future, we could easily see us follow up with another round of puts if that happens.

For now, we recommend you sit tight.

Action to take: Hold your November $40 BP puts for now.

That’s our only real update this week. We are deep in our search for your next play. That should hit your inbox later this week.

Now, let’s open up the mailbag…

Legacy Income Trader Mailbag

It was a pretty light week for the mailbag. But we did get some great – and one rather remarkable – emails we’d like to share with you…

As always, you can send your own questions and comments to us at

Steve A. writes:

Do you have a regular time during the week or month that you publish your option recommendations?

How many typically do you recommend a month?

ABBV had run up before I could place the trade – same day as receiving BP. I didn’t get into the trade because I would be overweighed in energy if put the stock.

Thanks, Steve! We don’t keep regular schedules around here, besides these Sunday night sends for one simple reason… selling options doesn’t allow for a set recommendation schedule. We wish it did.

But as you said yourself, ABBV ran up too fast for you to act (sorry about that). We just can’t predict how long opportunities will last… or when they come along.

We would like to say you should expect around three new put recommendations per month. But that will vary, again depending on how many situations arise. Once the portfolio grows, and we are put some shares, you can expect even more recommendations… because, remember, we’re going to sell covered calls on any stock we are put.

As for your note about being overweight energy… that’s a great subject. It’s one we certainly consider ourselves.

Diversification is just as important with our strategy as any other equity strategy. We keep it in mind with our own picks. But you should too, as Steve did above.

We hope to have your next recommendation to you soon. And hopefully you’ll have more time to act on it.

Early Excercising

Our next (somewhat detailed) email comes from David M. from Texas. He starts off:

Hello Jim and Kelly,

I’m enjoying your Legacy Income Trader beta and am learning much. I entered the BP trade at $0.90 minus about $11 commission. So far, so good.

I opted out of the ABBV trade, in part, because Bill’s Simple Trading System and “think much, do little” mantra has convinced me to limit the amount of capital I expose to this overvalued market until conditions change (e.g. the Schiller P/E falls a bit).

Nevertheless, I’m tracking all of your trades here and in the Platinum portfolio and am convinced you are recommending strong companies that will do well in the long run. In due course, I expect to act on more of your recommendations.

By the way, I really like that B&P presents contrasting opinions which I can synthesize to tailor an overall investment approach I am comfortable with. It may be disconcerting to some that your various newsletters may, at times, hold conflicting opinions, but I find the fact that you do not all march in lockstep to the beat of the same drummer reassuring.

We’re glad you’re enjoying the beta so far. And yes, our strategy does sometimes conflict with our colleagues’ various strategies. But that’s the nature of investing. If everyone did it the same way, we wouldn’t have a functional marketplace in which to invest in the first place.

That said, we do have more similarities to other Bonner & Partners services like Braden Copeland’s Building Wealth and The Bill Bonner Letter than differences. We take the same approach with any investment: we want fundamentally strong, cheap and growing investments… ones that value shareholders and offer long-term beta value. Meaning, they are reaping benefits from larger, long-term trends.

The biggest difference is that we choose to collect guaranteed income upfront, by selling options. Like we are doing with our BP position. We could have simply bought the stock, because we believed it was oversold. But then again, we have no idea how long it’ll take the rest of the market to catch on to that fact. So, we are happy to sell bets to the gamblers in the meantime.

David continues:

All that aside, I have a question in regards to options that are exercised. Do you have any information on the timing when in-the-money contracts are generally exercised? I imagine the vast majority of put and call buyers would wait until the last week, if not the expiration day itself, hoping for more gains, even if their position comes into-the-money well before expiration.

I’m not even sure this would have any bearing on your strategy because I don’t know if it would ever be prudent to buy back an in-the-money contract which you have sold. If there is such a scenario, though, and you do make that recommendation, then I suppose it’s possible it could already be too late to act if the holder of my contract has already exercised his option.

This is a great question. As you indicate, it does just depend on the person on the other end of the trade… the option buyer.

And you’re right, for the most part, if an option is ever exercised, it’s usually in the last week before expiration. That’s, as you said, because option buyers are typically hoping for bigger gains. So they wait until the end.

The one exception that would make an option buyer exercise earlier than the last week, or last day, is when there’s a dividend at play.

With covered calls for instance, we own the shares. So for the option buyer to collect a dividend from those shares, he’d have to call them away from us before the ex-dividend date. That does happen with some in-the-money call options. When that happens, we do lose out on that payment. It doesn’t happen every time there’s a dividend paid on a stock that we have in-the-money puts on. But it does happen.

The other scenario that could come into play is you might see a put option exercised just after an ex-dividend date. The reason the option buyer does that is because in that case, he is the owner of the stock. He waits just long enough to collect that dividend before putting us his stock. But this is even rarer.

We will warn you if that’s a possibility. For our only portfolio position right now, we don’t have to worry about either scenario. Our BP puts are trading out-of-the-money… and the company’s latest quarterly payment went ex-dividend this past week. There won’t be another one until well after our puts expire.

We did get one final – and remarkable – email from Fred G. in response to our “what the buyer’s side of options looks like” series these past two weeks. We asked if anyone had some experience buying options, rather than selling them. And Fred’s note proved just how lucrative that side of the coin can be… with a great amount of luck, no doubt.

Fred writes:

I have had many losers on the call side of option buying, but my one large win was two contracts of TSLA. I bought nine months ago (a strike price of $50, expiring in Jan 2015). They cost me $2,000-plus and are now worth over $40,000.

All we can say is: congratulations Fred! That’s a huge gain. We still prefer the side where even the losers can still be gains, though.

That’s it for tonight. We’ll write again later in the week.

As always, send us your email at…

Or you can reach us on Facebook… or Twitter…


jimsig kellysig

Jim Nelson and Kelly Green

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