How low can it go?
That’s the question everyone seems to be asking about British Petroleum’s (BP) stock price.
At what price would you be willing to buy British Petroleum stock?
Think about it. At $37 per share, BP trades at book value and just six times earnings. And it pays a dividend of nearly 9%.
Of course, liability claims as a result of the oil spill in the Gulf of Mexico are going to do a hatchet job on the earnings for the next year or two. And the company may have to trim its dividend in order to reserve cash for legal expenses and government penalties. But at some point, the stock price will fully discount BP’s troubles… and value investors will gobble it up like vultures feasting on road kill.
Frankly, I wouldn’t touch BP here at $37 per share. There are just too many unknowns to make it a safe trade. Oh sure, the stock could bolt higher if oil suddenly stops gushing into the Gulf. But there are plenty of other bargain-priced oil stocks that would benefit once the well is capped – and they don’t have the liability exposure.
Maybe $30 a share is a fair price for BP. Or maybe $25.
I know $20 per share would be an absolute steal. Heck, at $20 per share, BP would have lost 67% of its market value. It would trade at three times earnings, a 50% discount to book value, and offer a 17% dividend yield.
Even the most stubborn bear would have to turn bullish on BP at that level.
Now, let me show you how to buy BP at $20 a share… and get paid for making the trade.
The strategy involves selling naked puts. It’s the safest and most profitable income-generating strategy around.
As I explained, buying BP stock at $37 per share is risky. No one knows what the future liabilities are. The stock could fall another 20%-30% from here before it’s seen as a real bargain for value investors.
By selling puts, however, we’ll collect income right away. And we’ll be profitable on the trade if BP shares go up, down, or stay the same.
If the stock is above $20 per share, the option will expire worthless. You’ll keep the $150 and have no further obligation.
In other words, the stock could fall another 50% from today’s already depressed level and you’d still make money on this trade.
It really is that simple.
These sorts of opportunities don’t come around often – usually it’s during a time of crisis, when investor fear causes option prices to inflate far beyond normal levels. The situation in the Gulf of Mexico is most definitely a crisis.
If you’re thinking about bottom fishing and trying to buy a few shares of British Petroleum on the cheap, then think again. You’ll be much better off selling some puts.
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