Today's options trading column will focus on Exxon Mobil and how to take advantage of rangebound motion with an iron condor spread trade in Exxon stock.
With employment numbers for March now behind us, we have to digest the news washing over the stock market. Cooler heads are likely to prevail. But with the potential that those cooler heads might not, we are going to dance with the megacaps inside the oil complex.
With the likelihood of unsettled motion, the wider view is still sideways over the summer. It seems important to make sure we set alerts at the edges of these short iron condors so that we can manage our risk.
On Friday, Exxon posted its eighth straight weekly gain. Shares also cleared a cup without handle that shows a 120.70 proper buy point.
Exxon Stock Today
Although Exxon, the former Dow Jones Industrial Average stock, ranks lower in its industry group, there is a pervasive bid below this chart. That action should allow us to recover if we get to the lower edges of the range, and yet not run up in an overly expansive move.
The short iron condor spread is a neutral position. It estimates prices in Exxon stock will sit in a range and allow us to capture erosion in price from the passage of time. This delivers steady gains for the trade.
Let's set up the short iron condor spread in this fashion:
- Sell to open 1 XOM June 21-expiration call with a 130 strike
- Buy to open 1 XOM June 21 140 call
- Sell to open 1 XOM June 21 110 put
- Buy to open 1 XOM June 21 100 put
Watch These Price Levels
Total credit of $2.03 per set of options contracts, based on recent trading, means the break-even sits near two levels in Exxon stock: 132.03 on the high side and 107.97 on the low side.
The ideal strategy result gives us two choices to exit the trade. One, sell the short iron condor spread once it carries an acceptable profit. That's around 50% for me. Two, sell the short iron condor spread once it hits your loss threshold as determined by personal risk.
Stock hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself under the backdrop of the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD.
The goal of taking on the short iron condor? Allow time decay to work for us as we potentially watch the price action sit still while time decay (theta) increases our gains over time.
Options sellers sit in position to win in two ways. Either the stock does nothing or Exxon stock moves within the ranges relative to the strategy. So we use this concept to minimize the risk of market exposure.
Identify Key Chart Levels
The monthly resistance zone sits near its current highs at 120 and a Fibonacci expansion into 130. Price support sits near 115 to 110. These two levels give us room for prices to move around. That is, dip and then rise again.
Expect earnings from Exxon on April 26. If you expect volatility to expand as that date approaches, pay closer attention to the size of your exposure. Also keep these scenarios in mind:
- Exxon stock grinds higher or lower into our risk thresholds. We exit the trade.
- XOM stays in a range. The trade gains slowly over time.
- Exxon stock grinds higher or lower into our profit thresholds and we exit the trade.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully. Be patient and allow price action to move around a range of your stops.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades
