Exxon Mobil Corporation (NYSE:XOM) have vastly under performed both crude oil and oil stocks following an early September probe into accounting practices by the New York Attorney General. However, recent price action in Exxon stock indicates that a short-term bottom in XOM might finally be in place.
The manner in which Exxon Mobil chose to handle reserve bookings and impairments differs from another major oil company, Chevron Corporation (NYSE:CVX). While the valuing of reserves and future prices is certainly open for debate, the premium that Exxon Mobil stock traded versus CVX has all but disappeared.
On a shorter-term basis, XOM has traded at a big discount to the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE), a basket of energy stocks of which Exxon Mobil carries the largest weight. If you strip out Exxon stock from XLE, the discount becomes even more glaring.
Normally, XOM and XLE are highly correlated. I look for that correlation to realign somewhat, with Exxon being a relative outperformer.
Exxon Mobil stock is looking better on a technical basis, too. The critical $82.50 level has held several times after briefly being pierced intraday.
More importantly, XOM reached an oversold level using Bollinger Band analysis. Previous instances where Exxon was oversold proved to be significant short-term lows.
Of course, no analysis of XOM can be complete without a comparison to crude oil.
Since the April 4 low of $35.46, crude has tacked on a nearly 30% gain, while shares of Exxon Mobil have remained flat. This divergence is becoming extreme and should start to provide a floor in XOM stock in the near-term.
With Exxon stock trading at the biggest discount to both oil and other oil stocks, I think a hedged bullish put spread makes sense at these levels.
How to Trade Exxon Stock
Buy to open XOM Oct $79 puts and sell to open XOM Oct $81 puts for a 32-cent net credit.
These are the traditional monthly options that expire on Oct. 21, 2016. The maximum gain on the trade is $32 per spread with a maximum risk of $168 per spread. Return on risk is 19%. The short $81 strike is positioned well below the $82.50 support level.
With earnings due Oct. 28, I want to keep the option expiration before then to avoid earnings risk.
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.
