I never read any article on SA about BP oil spill but I believe there are hundreds, both very smart and very stupid. So investors have all the information to consider how to use it. I will not waste my time and yours to write about the Gulf coast states ecological and economic disaster that is coming in the next 12-24 months and about 50 miles inland will be no mans land after toxic chemicals were used by BP Plc to keep oil below the water surface to keep public in the dark about the the size of the oil spill and effects of toxic chemicals used on the sea shore and inland.
All you can be sure about is that in the near future all the real estate by the sea in Gulf U.S. states will be worthless and same all real estate about 50 miles inland.
All the people who live there will be deported by force more deep inside the states, country and all this zone will be like Chernobyl for over 100 years. Nobody will be compensated for their real estate insured losses, bankrupt businesses because U.S. government can't do it, they don't have this money so maximum millionaires living now in this areas will get is a Social Security coupons to buy junk food and few bucks to make a laundry, it will be not enough even to make a hair cut once a month. Everybody will be very, very poor in a very, very short time.
So how to make money from a bankrupt company such as BP Plc?
Go short now at $39? Maybe.
Buy BP LEAPS put options? Maybe.
But there is one total risk free trade that I made (risk free to me, selling BP stock short)), this trade can facilitate even a biggest hedge fund because of trade's liquidity, also it is suitable to a small traders who have futures and equities/options trading account.
In the chart below you see the decade of history of Crude Oil and BP price correlation. When ECL (Crude Oil futures continuous) was low double digits per barrel ($20-$30 on the right of the chart), ( BP ) stock was about the same $30.
There is very close correlation between BP and Crude Oil prices when Crude Oil is cheap and there is beta of 0.5 for BP to Crude Oil when Crude Oil is trading at triple digits. As you see in this chart that when ECL was about $144, BP was about $70. Today ECL is $77 and BP is $39 so it's perfect correlation only when you must remember two things:
1. BP is bust in the short to medium term (1-3 years) because of it's oil spill liabilities. In the world of oil business there are no sentiments or good hearts, there is a dog eat dog mentality where giants fight with the giants. For small fish there is nothing to do in there concerning BP situation. BP has no friends even if it's connected to a UK ruling elite or Texas elite (you know who they are, right?), all the biggest oil companies are connected to somebody, somewhere and for them BP is already bust, they are in the game with their armies to conquer what's left to take over, BP is the seller they are the buyers. The oil spill costs are higher than what BP would earn in the next 100 years (they have only $7B in cash, $32B in debt not counting oil spill disaster costs, income is (was) $20B) or $2T.
The costs and hit to U.S. Gulf states for the next 100 years is not lower, because they will be closed like a Guantanamo, with wire and military check points, inside will be only U.S. Army and scientist, experts on chemistry, toxins, biology, radioactive, ecology, physics and they will wear same costumes as in a plutonium and uranium enrichment plants and nuclear energy reactors.
So finally the total risk free trade:
Buy $1,000,000 ECLZ13 (Crude Oil December 2013) at $83-$85
Sell short $2,000,000 ( PB ) at $36-$40 last was $38.16
Now let's say Crude Oil will go to $120 and you will make about 50% or $500,000
At the same time even in the best case scenario ( BP ) will be not higher than today $38.16 because even if their profits will grow, the liabilities will grow much more.
Now let's say Crude Oil will go down to $21 in December 2013 and you will lose about 75% or $750,000
At the same time ( BP ) even without oil spill liabilities (it's crazy to even think in this way) will be about $21 just as you could see on the chart. So your profit will be on this trade about $1,000,000 and total profit $250,000 and this is in the magic miracle dream case. From $3,000,000 allocated to this trade (or $3,000,000,000) your profits will be about 10% in a short time. This is not much but considering this is risk free trade, this is very, very much.
For private traders with small accounts I would advise this trade:
Buy 100 BP January 2012 puts strike $20 at $2.30 for a total $23,000
If you want to protect yourself later and make out of this trade a risk free trade, sell short 100 BP puts Jan. 2012 strike $15 or $10 for the same price you have paid for $20 puts. This way you don't need to deposit any margin (covered put) and even if BP will stay above $20 you will have your money back completely.
At $15 you will make $50,000 total, at $10 you will make $100,000 total if you will do as I described with covered puts.
Without protection you'll make at $15 total $27,000, at $10 total $77,000
At BP $1 or $0 you'll make $177,000 maximum
For medium and big volume traders:
Sell short BP now at $34-$40 last $38.12 and relax, use full margin of the $ value, let's say selling 1000 shares at $38 ($38,000) use minimum $38,000 margin.
Link: http://BPPLC.notlong.com
$37.77 (07/16/10)
