In the dynamic world of energy markets, a seismic shift is underway.
Crude oil, often regarded as the lifeblood of the global economy, has been making waves as it surges towards the $90 mark.
This dramatic ascent, driven by a multitude of factors, has captured the attention of traders and investors worldwide.
With oil prices rising from the mid-$60s to the high $80’s, the stakes are high and the opportunities abundant.
Today, we’re looking at an options strategy that can generate a sizeable income from rising oil prices.
We will delve into the intricacies of a covered call strategy tailored to leverage the potential surge in crude oil towards $90.
XOM Covered Call Example
Exxon Mobil (XOM) is positioned as one of the world's largest integrated oil and gas companies.
Its diversified operations spanning exploration, production, refining, and marketing allow investors to benefit from increased oil prices while mitigating risk through its extensive portfolio.
Additionally, Exxon Mobil's historical track record of stability and dividend payments adds an income component to potential capital gains, making it an appealing choice for investors seeking exposure to the oil market.
When running the Covered Call Screener for XOM, we find the following results:
Let’s evaluate the first covered call example.
Buying 100 shares of XOM stock would cost $11,451. The November 17, $125-strike call option was trading yesterday for around $1.16, generating $116 in premium per contract for covered call sellers.
Selling the call option generates an income of 1.02% in 43 days, equalling around 8.49% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of $125?
If XOM closes above $125 on the expiration date, the shares will be called away at $125, leaving the trader with a total profit of $1,165 (gain on the shares plus the $116 option premium received).
That equates to a 10.3% return, which is 52.8% on an annualized basis.
Let’s look at another example, this time using a lower strike price which provides less more but less scope for capital appreciation.
Instead of the November $125 call, let’s look at the $115 call.
Selling the November 17, $115-strike call option for $4.80 generates an income of 4.38%, in 43 days, equalling around 36.29% annualized.
If XOM closes above $115 on the expiration date, the shares will be called away at $125, leaving the trader with a total profit of $529 (gain on the shares plus the $480 option premium received).
That equates to a 4.8% return, which is 24.8% on an annualized basis.
Of course, the risk with the trade is that the XOM might drop, which could wipe out any gains made from selling the call.
Barchart Technical Opinion
The Barchart Technical Opinion rating is a 40% Buy with a Strengthening short term outlook on maintaining the current direction.
The market is approaching overbought territory. Be watchful of a trend reversal.
Implied volatility is at 21.16% compared to a 12-month low of 19.59% and a 12-month high of 45.99%. The implied volatility rank is 5.96% and the IV percentile is 2%.
XOM currently yields around 3.21% annually.
Profile
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.
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.
