After a stunning 18% rally off the Jan. 20 intraday low of $71.55, shares of Exxon Mobil Corporation (XOM) look a bit haggard. While Exxon Mobil stock cleared some resistance at the $84 level, the strength of the breakout was less than impressive.
Click to Enlarge Exxon Mobil, normally highly correlated to the price of oil, has outperformed dramatically over the past two weeks.
Since crude oil made a high of $41.67 on March 17, it has fallen some 8%. In that same time frame, XOM has rallied slightly.
When Exxon stock hit its recent high of $87.44 on Nov. 3, crude oil closed at $47.68. Tuesday, XOM closed at $84.53, a drop of 3.4%. Crude oil, meanwhile, closed at $38.49, a drop of over 19%. The divergence between oil and XOM shares has certainly widened appreciably.
Click to Enlarge I expect this Exxon Mobil stock’s outperformance of oil to realign, with XOM being a relative underperformer to oil over the upcoming month.
Stocks generally had a very impressive day Tuesday following Federal Reserve Board Chair Janet Yellen’s dovish policy statements. Normally, the “looser for longer” monetary policy expressed by Yellen would have been much more constructive for oil prices. Yet, oil failed to put in any semblance of a rally, closing down on the day and just above the critical $38 support level. I look for oil (and stocks tied to the price movement of oil) to struggle in the months ahead.
Nomura Securities recently issued a report stating valuation concerns with Exxon Mobil, initiating coverage with a reduce rating and a $70 price target.
At 22 times earnings, Exxon stock trades at a premium to both its peer group and the overall market. With XOM closing at $84.53, the $70 price target represents a 17% discount to current XOM stock levels.
While I am not nearly as bearish as Nomura, I do feel XOM is poised for a pullback. Given that the implied volatility of option prices are at the low end of the recent range at the 25% percentile, I favor a simple put vertical play.
Best Bet With XOM Stock
Buy XOM May $85 puts and sell XOM May $80 puts for a $1.75 net debit.
The maximum risk on the trade is the net debit paid of $175 per spread, with the maximum potential gain of $325 being realized if XOM closes below $80 on May expiration.
Your potential return for taking a risk with a woozy XOM stock? 185%. Not bad.
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.
