Traders Buy Into the ‘Unknown’ After Gulf Spill

In a game of very high risks and even higher rewards, investors this year have been attempting to buy in the aftermath of events with no immediately quantifiable impact, such as the Gulf oil spill, the West Virginia coal mine explosion, the Iceland erupting volcano, and even the Goldman Sachs SEC case.

Contrarian traders are betting that the initial reaction to these events is overdone as investors not wanting to wait and find out the ultimate impact, dump en masse.

BP shares dropped more than 8 percent last Thursday as the oil gushing from the Deepwater Horizon rig began to increase. The shares fell another four percent on Monday. BP today however, is one of the few stocks on the rise even as the rest of the market goes through an intense pullback.

“The initial knee-jerk reaction is typically overdone,” said Karen Finerman, President of Metropolitan Capital Advisors. “ We’ve seen over the years these events create opportunities, such as the SARS scare weighing on luxury goods makers in Japan, the Avian flu hitting chicken processors and swine flu hurting airport operators.”

Finerman, who is also a ‘Fast Money’ trader, bought call options in Transocean , operator of the offshore rig, late last week. Call options – or the right to buy a set amount of shares at a future date for a specific price – are sometimes the best way to play these unknowable events because you at least know how much you have at risk, according to Finerman. This position hasn’t paid off yet for her, but additional purchases in Anadarko Petroleum and BP this week have started to.

“Shocking, external events that cause huge selling can produce climactic lows quickly,” wrote Philip Roth, chief technical market analyst for Miller Tabak. “If that is the case with the stocks of companies involved with the Gulf well, we should see volume and volatility subside quickly, and reactions in the form of tests or only slightly lower lows.”

For Transocean, which closed yesterday at $72.95 and is off slightly today, Roth sees the stock as oversold and finding immediate support at the $70 to $71 levels. If the shares break through that, then all bets should be off until the stock hits the mid $60s.

This strategy can certainly backfire. Many traders learned the hard way in the aftermath of the tragic explosion in West Virginia in a mine operated by Massey Energy. After an initial plunge, the coal company’s shares stabilized mid-April as value buyers stepped in on the belief that production would be ramped up at other mines and that litigation costs for the victims would be controlled or paid by external insurance.

What those buyers didn’t count on were reports from NPR and The Washington Post that the FBI and others may be possibly looking into safety infractions by Massey before the incident. That’s the risk of investing into the unknown, more unknowns.

For the best market insight, catch 'Fast Money' each night at 5pm ET on CNBC.

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Trader disclosure: On May 4, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Najarian Owns (PFE); Najarian Owns (GS) Calls; Najarian Owns (MS); Najarian Owns (C) Calls; Najarian Owns (SFD) Calls; Najarian Owns (TEVA); Adami Owns (AGU), (C), (INTC), (GS), (NUE), (MSFT), (BTU); Finerman's Firm Is Short (IYR), (IJR), (MDY), (SPY), (USO); Finerman's Firm Is Long S&P Puts; Finerman Owns (AAPL); Finerman's Firm Owns (AEO), (ARM); Finerman Owns (BAC), (BAC) Preferred; Finerman's Firm Owns (BAC), (BAC) Calls; Finerman's Firm And Finerman Own (CVS); Finerman's Firm And Finerman Own (JPM); Finerman's Firm And Finerman Own (RIG), (RIG) Calls; Finerman's Firm Owns (WFC) Preferred; Terranova Owns (PFE), (SWN), (XCO), (TER); Terranova Owns (C) May Calls; Terranova Is Long Gold June 2010 Futures; Terranova Is Short (CMA); Edwards Owns (VXX); Kelly Owns (FXE) Puts; Kelly Owns (FXB) Puts; Cortes Is Long Treasuries; Cortes Is Long U.S. Dollar; Nations Owns (SPY)

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