BP – When to exit?

Earlier, specifically on June 16, I stated the following about BP:

For people that insist on getting into BP, the next couple weeks should be a good time. The exact timing in terms of price is an unknown variable, but I would estimate layering in 25-30 dollars a share (e.g. if it goes down to 28, you will get a 40% allocation).

Indeed, the common shares fell to a low of 26.75, which means that using the “25-30 dollars a share” algorithm would have resulted in a 62.5% position (e.g. if your typical position is 5% of your portfolio then you would have ended up with 62.5% of 5%, which would be 3.125%). The average price would have been $28.375/share, not factoring in commissions.

Now that BP has risen and the big headline (“they’ve solved the oil leak”) has come out in the news, it brings up questions of what the ideal price to liquidate will be.

I see a two-phased trading approach should work well. The first phase should involve an immediate bump up due to the “news” coming out. This has mostly occurred, as you can see by this one-day chart:

After attracting the initial wave of profit-takers, I anticipate a second wave of demand coming for BP shares which should bring the stock to the $45-50 range. This is the target I would set for my sell order. The simple justification is that I estimate this whole debacle should cost BP about $40 billion dollars, or about $13/share. Before this all began, BP was valued at around $60/share, so simple math would assume an approximate $45-50 valuation, hence the sell point at this price. Assuming the exit is achieved, you would be looking at around a 67% gain on the transaction, which I would estimate between now and the end of the year.

This is a very elementary valuation exercise; naturally to properly model the situation you have to take into assumption the strategic effects of the oil spill (i.e. reduced offshore drilling in the Gulf of Mexico) but also have to strongly factor political considerations.

I have not and will likely not trade common equity in BP, but I have sold puts on Transocean and they have moved out of the money at present from my initial transactions. They will likely expire in August.

This was probably one of the better trading opportunities I have seen in 2010.

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