Market Overview

Carter Worth And Mike Khouw's BP Trade


Crude oil companies have been under pressure for quite some time and CNBC Options Action's Carter Worth thinks that there is more to come. On Friday, he spoke on the show about a potential dividend cut for big oil companies.

Worth believes that there is going to be a dividend cut because the earnings of big oil companies are not good enough to cover current dividends. Mike Khouw added that the options market is implying a 35 percent cut in dividend for Exxon Mobil Corporation (NYSE: XOM), while for Chevron Corporation (NYSE: CVX) and BP plc (ADR) (NYSE: BP) it is implying 25 percent and 38 percent cut respectively.

Khouw thinks that it is hard to expect for these companies to maintain a steady dividend growth because their free cash flow is going to be reduced significantly. The big oil companies haven't so far reduced dividends, but have only suspended buybacks and reduced capex.

Worth presented a couple of chart patterns for BP that suggest that there is more downturn for the stock. He pointed to a head and shoulders pattern on a long-term chart and he also showed a two-year daily chart with a pattern that suggests that the stock is about to test its prior lows. Worth believes that it is going to break below that price level.

Khouw suggested a bearish options strategy in BP. He explained that the options premiums are higher right now, but he thinks that they are going to be even higher and that is why he doesn't want to sell any options. Khouw believes that the best idea is to buy the July 36 put for $1.80. The breakeven for the trade is at $34.20 or approximately 9 percent lower from current price.


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