In morning trading on Oct. 4, Barchart reported large unusual activity in Exxon (XOM) put options. These were in deep out-of-the-money puts. Some investors may be doing this to collect extra income.
For example, the Barchart Unusual Stock Options Activity Report showed that over 20,000 put contracts were traded at the $100 strike price for expiration on December 15, 2023. That is 72 days from now and the strike price is over $12 below (i.e., out-of-the-money) today's spot price of $112.39.
The premium for those puts was at $1.57 at the midpoint. Therefore, those traders who initiated this trade by selling these OTM put options collected $1.57 on an investment of $100.00 per contract. That works out to an immediate yield of 1.57% over the next 2 ½ months.
Moreover, their breakeven price is $98.43 (i.e., $100-$1.57), which is 12.42% below today's price. That makes them believe that there is plenty of room for XOM stock to fall before they would be forced to buy XOM stock.
On the opposite side of this trade, it shows that a large number of investors believe that XOM might actually fall below $98.43 on or before Dec. 15, 2023. Keep in mind that the company will have reported its Q3 numbers by then. Moreover, the price of oil could be greatly affected by how global activity turns out during the fourth quarter as well, which will in turn affect the price of XOM by then.
In other words, it is a pretty big gamble to buy these put options assuming that XOM stock will fall almost 12.5%.
Exxon is Generating Huge Amounts of Cash Flow
The problem for those investors who are long these puts is that Exxon is still generating vast sums of cash flow. That tends to keep the stock very robust.
For example, I discussed this in my Sept. 22 Barchart article, “Exxon Is Gushing Huge Amounts of Free Cash Flow - XOM Stock Could Rise Further.”
During Q2 Exxon produced $5 billion in free cash flow (FCF). This was after it raised its capex spending. Moreover, throughout tH1 2023, Exxon generated $16.4 billion in FCF. FCF for Q3 2023 could rise to between $11 billion and $13 billion.
That implies $30 billion in FCF for Q1 - Q3, and potentially up to $50 billion for all of 2023. That is lower than the $60 billion it made in 2022, but it still implies a much higher stock price.
For example, assuming that Exxon generates $44 billion in FCF in 2023, we can estimate its market cap will reach $587 billion. That is seen by using a 7.5% FCF metric, which is the same as multiplying FCF by 13.3x. So, $44 billion x 13.3x equals an expected market cap of $586.67 billion.
This is 30.8% higher than its present market cap of $448.44 billion, according to Yahoo! Finance. In fact, even using a 9% FCF yield (i.e., 11.1x FCF), its market cap would be $488.9 billion, or 9% higher than today's price.
That implies that XOM stock is worth between 9% and 30.8% more or on average a target price that is 20% higher, i.e., $134.75.
This shows why investors who shorted these $100 puts likely have the edge in this unusual stock options activity today.
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.
