Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Want To Earn A Safe 5% In Fixed Income? Buy Preferred Stocks - 24th April 19
Can Gold Price Rise Without a Rate Cut?  - 24th April 19
Silver’s Next Big Move - 24th April 19
How Can a College Student Invest Wisely? - 24th April 19
Prepare For Unknown Stock Market Price Action As New Highs Are Reached - 23rd April 19
Silver Plays a Small but Vital Role in Every Portfolio - 23rd April 19
Forecasting 2020s : Two Recessions, Higher Taxes, and Japan-Like Flat Markets - 23rd April 19
Gold and Silver Give Traders Another Buying Opportunity - 23rd April 19
Stock Market Pause Should Extend - 21st April 19
Why Gold Has Been the Second Best Asset Class for the Last 20 Years - 21st April 19
Could Taxing the Rich Solve Income Inequality? - 21st April 19
Stock Market Euphoria Stunts Gold - 20th April 19
Is Political Partisanship Killing America? - 20th April 19
Trump - They Were All Lying - 20th April 19
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

How to Make a 59% Dividend From BP

Companies / Options & Warrants Jun 08, 2010 - 12:17 PM GMT

By: DailyWealth


Best Financial Markets Analysis ArticleTom Dyson writes: The Gulf of Mexico oil leak is a disaster for the environment, a disaster for the local economy, and may even prove to be a disaster for the stock market if the government decides to punish the offshore drilling industry.

But it could be the best thing that happens to your portfolio this year...

Today, I'm going to show you how to use the Gulf oil disaster to generate a 59% dividend. This is a unique trading opportunity using "stink bids." It's a little bit unusual, but it's worth taking the time to understand.

British Petroleum is the fourth-largest company in the world behind Wal-Mart, Exxon, and Royal Dutch Shell. It operates in 30 countries, generates $240 billion in annual revenues, and owns 22,400 gas stations.

The massive underwater oil leak in the Gulf of Mexico is the worst environmental disaster in America's history. And British Petroleum is the company responsible.

Right now, thousands of lawyers in Florida, Alabama, Mississippi, and Washington DC are rolling up their sleeves and preparing to sue BP for every cent they can get their hands on. This is shaping up to be one of the biggest corporate legal actions since asbestos and tobacco.

The stock market hates uncertainty. In this case, BP investors have no idea how much money BP might have to pay to clean up the mess. It's simply impossible to predict. (I've seen estimates for the total long-term liability ranging from $2 billion to $37 billion.) This uncertainty has caused a massive drop in BP's share price.

I downloaded BP's most recent annual report and did a quick diagnosis of BP's finances...

BP generates $30 billion a year in profit from operations. It reinvests $20 billion a year in its business and pays $10 billion a year in dividends to shareholders.

On top of BP's colossal ability to make money, it has a fortress balance sheet. BP has equity on the balance sheet of $104 billion, but only $24 billion in debt. With this low debt ratio, it has room to add at least double its debt load. BP also has $8 billion in spare cash to cover immediate expenses relating to the oil slick.

BP generates billions of profits each year on top of an awesome pile of accumulated wealth. In short, even if the oil spill ends up costing BP $37 billion, it won't have trouble paying the bill.

That said, even though BP is a rock-solid company and can easily afford its legal bills, I don't recommend you buy BP's stock at today's prices. Investors are in panic mode and you simply can't predict how much lower BP's share price will fall.

Instead, you should enter a "stink bid" on BP. When you make a stink bid, you're offering to buy a stock for way less than current prices. In return for making this offer, the market will pay you cash, upfront.

Let's say you set your stink bid at $33 a share – more than 10% below today's price – the market will pay you $2 for every share of BP you agree to buy. Your agreement only lasts through mid-July. So your $2 amounts to a 6% profit in five and a half weeks... or a 59% annual dividend. You collect this cash payment whether or not your stink bid gets hit.

If the market hits your stink bid, you'll own BP at a great price... Despite its legal troubles, BP is one of the largest, most profitable oil companies in the world.

So how do you place a stink bid? You do it through the options market, by selling a put option. Someone who sells a put is agreeing to buy a stock at a particular price. Selling "out of the money" puts is how you make a "stink bid." You get cash upfront for selling a put. And you agree to buy the underlying stock at a price way below where it's selling today.

In the example above, you'd sell the July $33 put and collect about $2 per put option you sold.

If you're new to options, this may sound confusing. But when investors panic, like they have with BP, it can be the safest income strategy in the world. It's worth doing some homework to get up to speed. Call your broker. Check out Yahoo's put primer here and Wikipedia's here (scroll down to "naked put").

With BP today, you have the opportunity to make the equivalent of a 59% annual yield. The big risk here is that the situation suddenly deteriorates and BP's stock collapses.

But with BP's massive financial resources and all the bad expectations already priced into its shares, the market is compensating you handsomely for taking this risk.

Good investing,

P.S. If you like the idea of collecting big income through the options market, there's nobody better to have on your side than my colleague Jeff Clark. Jeff thrives on the volatility we're seeing in the market these days, and he has perfected the art of grabbing large cash payments – safely – by selling options. Read more here.

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2010 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules