Stock Option Trading News

How to Make Income on British Petroleum — Even Without a Dividend

Due to the oil spill in the Gulf of Mexico, British Petroleum (BP) announced it is going to create a $20 bill fund to compensate victims and also cancel shareholder dividends for three quarters.

British Petroleum’s current annual %dividend is in the neighborhood of 10%. For those investors invested in BP depending on the dividend, this could be traumatic, especially if they don’t want to sell their BP stock because of tax reasons.

What should an investor stuck in this situation do?

Well, one thing they might do is to enter covered call positions for BP. A covered call investment consists selling a call option against a stock. The covered call strategy can be considered similar to renting out a house, except with stock.

Sign up now for PowerOptions 14-day free trial 

For example, a covered call position for BP for the 2010 July call option with a $31 strike price has a potential return of 8% – and that’s in only 30 days! An investor accustomed to receiving BP’s dividend could potentially make up the difference for the loss of income due to canceled dividends in a couple of months. Another nicety for an investor with existing BP stock entering a covered call position is that is does not require any additional capital!

See what the stock option experts are doing
 Sign up now for PowerOptionsApplied 30-day risk free trial 

A profit/loss graph for three contracts of this covered call position is shown below:

BP covered call profit/loss graph

A downside to this strategy is if the price of the BP stock were to increase, then the investor would not participate in the price appreciation of the stock. But, it doesn’t look like the price of BP’s stock is going to rise anytime soon, and if BP’s stock price does increase, then the covered call position can be rolled up in price in order to potentially generate more income and prevent the BP stock from being called away.

 Free portfolio insurance newsletter 
&raquo protect your investments 
&raquo sleep at night                    

To enter the covered call investing position an investor would purchase the stocks in multiples of 100 shares for their trading portfolio and sell one call option for each 100 shares of stock purchased for their personal stock portfolio.

 Free stock option newsletter 
         &raquo return goal > 2% / month 
&raquo works in any market

Investors concerned the price of BP’s stock might continue to decrease might consider entering a collar position instead of a covered call position. A collar position is basically a covered call position combined with some downside protection. The downside protection is provided by a put option. The amount of downside protection can be selected up front. For example, an investor might be comfortable with a loss of 8% for BP. Based on this a collar can be entered for the covered call mentioned above by purchasing a 2010 July put option with a 27.5 strike price. The potential return of the collar is 3.5%, which is less than the 8% return of the covered call, but the position is protected against a drop in BP’s stock price of greater than 8%. The collar with a 3.5% return could still enable an investor to make up for the loss of BP’s dividend, but within three months instead of two months as is the case with the covered call.

 Want to protect your portfolio/401K from market downside?
 yet still benefit from market upside 
 Sign up now for the free Sketch 

A profit/loss graph for three contracts of this collar position is shown below:

BP collar profit/loss graph

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

 Learn how to profit from winner stocks 
 and protect yourself from loser stocks 
 Download free Trade Simulator now 

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

 Learn to trade like the pros 
 Signup for free Webinars now 

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

[tags] oil spill, Gulf of Mexico, BP, British Petroleum Co. [/tags]

Leave a Reply

Your email address will not be published. Required fields are marked *