Put options on BP may look like a tempting play here, but we wouldn’t touch them with a ten-foot pole. The company’s shares have rocketed nearly 40% since late June, making them appear ripe for a retrenchment. Don’t bet too heavily on it, though.  The puts are so pricey at the moment that you could probably get better odds buying scratch-off cards at the liquor store. August near-the-moneys, for one, are trading with an implied volatility of around 70, meaning the stock would have to plummet by at least 11% before August 20 for bearish speculators to merely break even. Stranger things have happened, of course, but anyone who made essentially the same bet on Friday, just ahead of yesterday’s powerful short-squeeze rally, would have seen a third of his stake go up in smoke at the opening bell. The August 36 puts eventually settled at 2.87, down 1.48 on the day, and they could get halved again on Tuesday morning if BP shares open firm-to-higher.

Carnage in the July puts has been even worse, since they are due to expire this Friday. The chart above shows how the July 33 puts have fared since early June, when the stock was trading about where it is now — around $36 per share. With fear and despair hitting a transitory peak back then on horrific headlines and the prospect of a tar-ball disaster spreading along length of the Eastern Seaboard, the puts nearly tripled in price in a single day, rocketing from $224 to $650. Yesterday, however, those same puts could have been bought for as little as $18, and they seem unlikely at this point to awaken from their coma unless the latest effort to cap the oil blowout meets with a catastrophic setback.

Careful What You Wish For

It will take nothing less than that to rally the puts to new heights, since even a BP bankruptcy might not affect corporate assets held outside the driller’s North American subsidiary. BP of North America is said to possess assets valued at around $50 billion, but the firm’s exposure might wind up being capped at the $20 billion sum placed into escrow for disaster relief.  Meanwhile, those who are betting on out-of-the-money puts should be careful what they wish for, since a big payoff seems likely only if the planet suffers damage from the spill of a magnitude that has yet to be imagined.

Incidentally, Rick’s Picks subscribers were well prepared for yesterday’s explosive surge, since we’d disseminated the following forecast the night before, the stock having last traded at 34.02:  “Put-holders should brace for a surge to at least 36.60 – or possibly 37.81 if any higher — if it appears that BP’s latest oil-gusher cap is working.” Yesterday’s actual high was 37.00, so there would appear to be at least a little more upside before BP hits a Hidden Pivot resistance with some stopping power.

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