BP Options Signal Into Earnings Reaction & Hayward Ouster (BP)

BP plc (NYSE: BP) finds itself in an odd situation with stock options trading versus its pending earnings announcement Tuesday and the imminent departure of Tony Hayward as CEO.  While shares have risen more than 40% from lows, BP is still down almost 40% from when the Deepwater Horizon became the Deepwater Nightmare.  Forging an earnings estimate at this point is likely pure guesswork.  Where the big tell is comes down to the trading and pricing of stock options for the August 2010 expiration.  The 100 days of the past could go either way, but whichever way it goes the options market is signaling a large move.

First, Tony Hayward is expected to be gone.  If not entirely gone, he is likely to loose the role of CEO of BP Americas.  If Hayward stays on, it would be a shock to the shares which have gained 5% today.  The wild card with earnings is the combination of its asset sales and the rest of BP’s operations throughout the world.  Using earnings from operations versus net numbers is also something we’ll leave to the analysts.

Estimates from Thomson Reuters, in dollars, are as follows:

• Q2-2010 $1.39
• Q3-2010 $1.16
• FY-2010    $5.65
• FY-2011 $6.42

Again, it is the stock options that have the move flagged for the August expiration dates.  After running the prices of the $40 Calls and the $37.50 Puts, it is obvious that options traders are bracing for a move of $2.50 to $3.00 based on the $38.60 ADR price today.  That figure is of course static based on current prices rather than knowing each option trader’s book.

It is not just a positive bias either.  The most active contract seen today is the $35.00 Put with more than 11,000 contracts traded versus an open interest of 17,938 contracts.  The AUG 2010 $40 Calls have seen 9,588 contracts trade today versus and open interest of 41,269 contracts.

BP has dropped its dividend.  The company has sold off assets. It has pledged a $20 billion clean-up fund.  Trying to predict what the ‘operating earnings’ is in this global outfit is something we are passing on.  After seeing the volatility pricing into the event where its CEO is supposed to get the boot offers insight enough.

JON C. OGG