Exxon Mobil Corp (XOM) stock now has a 3.95% dividend yield to new investors at today's price. That makes XOM stock attractive to value buyers. In addition, put premiums are at high levels. That makes shorting out-of-the-money (OTM) put options in near-term expiry periods attractive as an income play for existing investors.
Exxon pays an annual dividend of $3.80, so at today's price of $96.07. That gives investors almost a 4.0% dividend yield (3.95%) and will reach 4.0% if the stock falls to $95.00.
There is no concern that Exxon will be able to fund this dividend. This is because its free cash flow (FCF) is still very strong.
I discussed this in my last Barchart article on Dec. 31, “Exxon Stock Is at a Trough and Is Cheap Here Given Its Massive Free Cash Flow.”
Shorting OTM Puts in XOM Stock
I also showed that existing investors can make extra income by shorting OTM puts. For example, I recommended shorting the $95.00 strike price put option that expired on Jan. 19. At the time, this was 3 weeks away and the strike price was 5% below the stock price at the time ($99.98).
As a result, the 44 cents received shorting the put provided a 0.463% put yield. Since the stock ended up OTM, the short put investor had no obligation to buy more shares and the yield earned was clean.
This play can be repeated now, given that put premiums are still high. For example, look at the $90.00 strike price put for the Feb. 9 expiration period, which is 3 weeks away.
It shows that the short seller of these puts can now earn 48 cents per put contract shorted. The income generated from this play is equal to a 3-week yield of 0.533% (i.e., $0.48/$90.00).
So, if that trade can be repeated every 3 weeks for a year (i.e., 17 periods of 3 weeks in a year), the annualized expected return (ER) is 9.06%. This is seen by multiplying $0.48 by 17x.
In other words, the investor can make a very good income shorting XOM puts at strike prices below the current price in near-term expiry periods.
Downside Risk Considered
The investor who does this should not expect that they will make money every time they do this. For example, if XOM falls below $90.00 in this case, they will have to purchase XOM stock at $90.00. That could mean the investor has an unrealized capital loss for that transaction, especially if XOM stock stays below $90.00 for a good while.
But consider this. At $90.00 XOM stock has a dividend yield of 4.22%. That fact alone will make it even more attractive to value buyers at that price. In other words, there is a powerful force that could help push XOM stock back higher.
Moreover, the investor who has to buy XOM shares at that price can turn around and sell OTM call options in near-term periods. Those would be covered calls since the investor already has had to buy the stock. This could help alleviate any unrealized loss.
The bottom line is that XOM stock is very attractive at these prices. The OTM put option short seller can make extra income. They also have alternatives if the stock falls to the point where the put option is exercised and investors have an unrealized capital loss.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
