Exxon Mobil (XOM) stock was down 4% today in above average volume.
By using a combination of option strategies, we could potentially buy the stock for a significant discount, or achieve a healthy profit if the stock trades sideways.
Here’s the trade:
- Sell to open the XOM June 16 put with a strike price of 110, which was trading around $1.35 yesterday.
Then, add a bear call spread:
- Sell to open the XOM June 16 call with a strike price of 120, which was trading around $0.85 yesterday.
- Buy to open the XOM June 16 call with a strike price of 125, which was trading around $0.35 yesterday.
The sold put brings in around $135 in option premium, and the bear call spread add another $50 in premium. In total, the combination of the two trades generates $185 in premium.
Here’s how the trade looks at trade initiation. The blue line represents the profit or loss at expiration and the purple line shows the trade as of today.
The position starts with a delta of 9, meaning it is roughly equivalent to owing 9 shares of XOM stock. This figure will change as the trade progresses.
This is how the trade could look in around one month’s time.
Possible Scenarios For This Exxon Mobil Stock Option Trade
Let’s work through a couple of scenarios of how this trade could look at expiration on June 16.
- If XOM stock trades sideways and finishes between 100 and 120, the sold put and bear call spread will both expire worthless. The total profit will be equal to the premium received of $185.
- IF XOM falls below 100 at expiration, we will be assigned on the sold put and will be forced to buy 100 shares at 100. However, our net cost basis will be 98.15, thanks to the $185 in option premium received. That is 10.85% below the closing price yesterday.
- If XOM rallies above 125, the bear call spread will suffer a full loss of $500, but this will be slightly offset by the $185 premium received, leaving us with just a loss of $315.
Company Details
Exxon Mobil is currently rated a Buy. The Barchart Technical Opinion rating is a 48% Buy with a weakest short term outlook on maintaining the current direction.
Of 17 analysts covering XOM, 10 have a strong buy rating and 7 have a hold rating.
Implied volatility is 27.71% compared to a twelve-month high of 46.18% and a low of 23.94%. That gives XOM stock an IV Percentile of 12% and an IV Rank of 16.96%.
Exxon Mobil is has already reported Q1 earnings, so this trade would have no earnings risk if held to expiration.
ExxonMobil's bellwether status in the energy space, optimal integrated capital structure that has historically produced industry-leading returns and management's track record of capex discipline across the commodity price cycle make it a relatively lower-risk energy sector play.
The company owns some of the most prolific upstream assets globally.
Other aspects of the company's story include the largest global refining operations, substantial chemicals assets and a dividend history and credit profile that are second to none in the space.
ExxonMobil's capital spending discipline is quite aggressive.
The company has a plan in place to allocate significant proportion of its budget to key oil and gas projects. The company's business perspective looks different from most peers since big oil rivals have pledged to lower carbon emissions to tackle climate change.
ExxonMobil divides its operations into three main segments: Upstream, Downstream and Chemical.
Summary
While this type of strategy requires a lot of capital, it is a great way to generate an income from stocks you want to own.
If you end up being assigned, you can start selling covered calls against the stock position.
You can do this on other stocks as well, but remember to start small until you understand a bit more about how this all works.
Mitigating Risk
With any option trade, it’s important to have a plan in place on how you will manage the trade if it moves against you.
Some traders like to add a deep out-of-the-money long put to reduce risk. For example, a June 16 put option with a strike price of 90 could be purchased for around $35. Buying this put, would cap losses below 90 and reduce total capital at risk from $9,800 to $850.
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.
On the date of publication, Gavin McMaster 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.
