Since my posts about BP have been quite popular recently, I thought I would comment on this article on Yahoo Finance. The article talks about how BP may be able to cap the well in the next few weeks. As I mentioned in the first post about BP, usually the market overreacts to bad information.
In this case, it turned out that the situation was really bad, in fact it is the worst oil spill in history. And the blame is landing squarely on BP. The share price has gone down since the accident, and it seems that the well will be plugged soon. Although we now know the massive damage caused by the well, it seems that BP’s share price may be turning around.
Does this mean that the price is heading back up?
Nobody knows. But here are some ideas about how to make money from the situation.
First, I think it is important to notice that the accident was a Black Swan event: no one could have predicted that the worst oil disaster in history would occur. However, once the stock started going down and there was no likely solutions to the problem, it may have been a good time to trade BP stock.
One way would have been to sell BP stock short. That means that we make money as the price goes down. Another way would have been to buy put options. This leverages the bet so that both the potential payoff and potential loss are higher. Although options require much more care and education that buying and selling stock, anyone who is committed can learn to trade them.
We can see that the price fell from 60 to 27, a drop of over 50%. If you think that the well will be capped soon and the stock will rebound, then it could be a good time to buy stock. When I first mentioned the stock, one of the attractive things about it was the yield, which would be about 9% at the current price. However, BP has stopped dividend payments (at least temporarily) and we really don’t know when they will be continued. One thing is clear: the cost of the cleanup will be massive.
One short term trade would be to buy call options. Similar to buying stock, this is a bet that the price will go up. The option provides leverage so that if we are right we can make much more money than by simply buying the stock. However, the chance of losing all the money that we put into the trade is much greater as well.
We can’t know if the stock is going to continue going down, or if it has just turned around and started going back up. However, we can learn to make the best of the situation. That means that by understanding our risk, we can choose a bet that will make the most amount of money given the loss that we are willing to risk. We need to choose a trade and a position size that fits those two requirements.
Ultimately, learning to be successful trader takes time and dedication. The good news is that anyone can do it. It is only a matter of committing enough time and energy to become proficient.