After falling over 10% from the recent intraday high of $87.44 on Nov. 3, shares of Exxon Mobil (XOM) appear to be consolidating just above the $79 support level.
Both actual and implied volatility have fallen significantly over the past week, with XOM stock price having less than a 2 point range over the past five trading days.
XOM Stock Charts
Crude oil, which has a high correlation to XOM stock, has also seen a definite dampening in volatility in recent days. Five-day realized volatility is approaching trough valuation levels, as seen in the chart.
Other metrics, such as Bollinger bands and average true range, are also showing a significant drop in volatility for both XOM and crude oil.
From a valuation perspective, Exxon Mobil stock carries a 17.2 price-to-earnings multiple, which is at a slight discount to the S&P 500 multiple of roughly 22. The dividend yield is an attractive 3.6%, which easily exceeds the yield of the 10-year Treasury bond of 2.25%. With a fortress balance sheet and a payout ratio of only 72.8%, the dividend looks to be very safe.
XOM also threw off $7.4 billion in free cash flow this year, in spite of lower oil. As an integrated energy company, Exxon Mobil is diversified enough to ride out any further weakness in oil prices. Its refining business and downstream activities benefit from a drop in crude.
With the threat of potential further terrorist attacks likely to be prevalent for the foreseeable future, oil prices should likely trade sideways to higher due to potential supply shocks based on the terrorism threat. While that would be a negative for stocks generally, it would be a definite benefit to XOM. So Big Oil companies, with Exxon Mobil being the biggest of the big, may see some sharp rotation into their shares.
To position for an anticipated upside breakout, using a call diagonal calendar spread structure makes sense. I would go long the at-the-money Jan $80 calls, while selling the shorter term out-of-the money Dec $82.50 calls for a $3 net debit. With implied volatility at comparatively low levels, long vega strategies are favored, with the diagonal being net long vega.
The short $82.50 strike is structured at the first resistance level near $82.50, shown below.
The spread is net long 25 deltas, with the maximum loss being limited to the net debit paid of $3. Max gain is undefined, but ideally XOM would be trading near $82.50 on December options expiration.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
