ExxonMobil has jumped back above the 200-day moving average and has been holding up well during this market correction. Let's consider a combination of two option trades for Exxon stock that could result in buying the stock for a significant discount.
This trade may also achieve a healthy profit if the stock trades sideways.
According to IBD Stock Checkup, XOM stock ranks 12th in its group and has a Composite Rating of 60, an EPS Rating of 32 and a Relative Strength Rating of 60. Plus, the stock has formed a nearly four-month base that offers an early entry point near 112.07.
Exxon Stock Today: Trade Setup
Here's the trade in Exxon stock. First, sell to open the XOM Oct. 20-expiring monthly put option with a strike price of 105, which was trading around $2.45 a share on Friday.
Next, add a bear call spread:
- Sell to open the XOM Oct. 20 call with a strike price of 120, which was trading around $0.65 on Friday.
- Buy to open the XOM Oct. 20 125 call, which was trading around $0.25.
The sold put brings in around $245 in option premium, and the bear call spread adds another $40 in premium. In total, the combination of the two trades generates $285 in premium per set of contracts.
The position starts with a delta of 25, meaning it is roughly equivalent to owing 25 shares of XOM stock. This figure will change as the trade progresses.
Possible Scenarios For This XOM Stock Option Trade
Let's work through a couple of scenarios of how this trade in Exxon stock could look at expiration on Oct. 20.
First, if XOM trades sideways and finishes between 105 and 120, the sold put and bear call spread will both expire worthless. The total profit will be equal to the premium received of $285.
Second, if Exxon stock falls below 105 at expiration, we will be assigned on the sold put and will be forced to buy 100 shares at 105. However, our net cost basis will be 102.15, thanks to the $285 in option premium received. That is 5.6% below Friday's closing price.
Limited Risk On the Bear Call Spread
Finally, if Exxon stock rallies above 125, the bear call spread will suffer a full loss of $500, but this will be mostly offset by the $285 premium received, leaving the trade with a small loss of $215.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ.
