Profit From the XOM Bounce With a Pair of Option Plays

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Crude oil bulls have finally awoken.

And their long awaited return was nothing short of glorious. The flurry of buying in the oil pits was good enough to lift crude as much as 21% last week from a lowly $37.75 to $45.90.

Naturally, energy stocks across the board staged a rousing rebound on the heels of oil’s newfound strength. Chief among them was Exxon Mobil (XOM), which has suffered tremendously amid the oil bear market.

And yet, despite last week’s epic rally, XOM stock remains firmly entrenched in a downtrend. For all its fury, the bullish stampede was only good for a counter-trend bounce … so far, anyway.

As shown in the accompanying XOM stock price chart, the oil behemoth sits comfortably beneath all its major moving averages. The series of lower pivot highs and lower pivot lows remains in place. With today’s move down, XOM was rejected predictably at its first level of potential resistance — the 20-day moving average.

xom-stock-chart

Source: OptionsAnalytix

Optimists will point toward the climactic volume seen during last week’s plunge-and-pop to suggest perhaps we’ve finally seen capitulation in Exxon Mobil. Such a climax would signal at least an intermediate-term low in the XOM stock slide.

We shall see. Further evidence such as a higher pivot low and remounting of the 20-day moving average would certainly make such a position more tenable.

A Pair of XOM Option Plays

If you’ve been an oil bear on the sidelines waiting for a lower risk opportunity to jump into the fray, now’s your chance. Implied volatility in XOM options remains elevated making short premium plays the most attractive here.

XOM Bears

Sell the Oct $80/$85 XOM call spread for 51 cent credit. The spread is poised to profit as long XOM stock price remains below $80 until Oct expiration.

The max reward is limited to the initial 51-cent net credit. The max risk is limited to the distance between strikes minus the net credit, or $4.49, and will be lost if XOM rallies above $85 by expiration.

XOM Bulls

If you’re a believer in the oil rebound and think XOM stock is unlikely to retest last week’s lows consider selling the Oct $67.50/$62.50 put spread for 60 cents credit.

The max reward is limited to the initial 60-cent net credit and will be captured if XOM can remain above $67.50 by Oct expiration. The max risk is limited to the distance between strikes minus the net credit, or $4.40, and will be lost if Exxon Mobil falls below $62.50 by expiration.

At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/pair-option-plays-xom-stock/.

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