Exxon Mobil Corporation (NYSE: XOM) is the largest company in America by market cap. The company may not be showing its record numbers seen back in the energy bubble, but numbers to the tune of $7.6 billion in earnings and almost $92.5 billion in revenue will make people look twice.
The company reported earnings this morning that came in at $1.60 per share excluding items, above the $1.47 expected from Thomson Reuters. With shares still very muted, there could be a great options trade lurking here.
The market’s reaction to earnings might have been larger if oil was on the move and had the $92.486 billion in revenue come closer to the $98.5 billion expected from Thomson Reuters. The problem with using Exxon revenues is that there are only a few analysts that make revenue predictions, which is very common for the behemoth companies.
XOM shares are also still suffering from the BP plc (NYSE: BP) effect and the new energy policies in Washington, D.C. BP was nearly $60 on April 20 before the explosion on the Deepwater Horizon, and it had lost more than half its value before the most recent share recovery.
Exxon Mobil shares were trading at $68.50 on April 20, and the stock is just under $61.50 after an almost 1% gain after earnings. With a 52-week range of $55.94 to $76.54, there could be some significant upside in Exxon Mobil.
For a speculative options trade, the trick is to get enough time value for the strike price to have a chance of being hit and paying a low enough premium that you have leverage. A 10-1 trade, a strike 10% above current prices and a premium of 1% of the stock price, is what we are looking for here.
The October options expire on Oct. 15, so there is less than 90 days until expiration. And the XOM Oct 67.50 Call is roughly at the 10% target, with a premium of only 31 cents ($31 per contract, which is less than most people pay to fill up their gas tank).
Many people compare Exxon to the market, and using the SPDR S&P 500 (NYSE: SPY) 10-1 scenario with the same expiration comes to the $121 strike and a premium of 68 cents.
It can be argued that any individual stock has a better chance of moving up or down 10% than the overall market. After all, the market could stagnate while a sector makes a big move. The Exxon contracts look cheaper than the SPDR contracts, and part of that is because the event risk of earnings has now passed.
If Exxon shares move up to around $65 over the next month, those XOM Oct 67.50 Calls could easily double from today’s levels. If the shares stagnate over the next month, the premium compression in the calls will not really have started to come into play.
“Inexpensive speculation” may seem like an oxymoron, but based on Exxon’s dominance and based on shares being slightly weaker than the SPDRs (-10.2% for Exxon versus -7.5% for the SPDRs), there seems to be a relatively inexpensive speculation trade opportunity here.
Follow Jon Ogg on Twitter @jonogg.
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