While the dithering dance continued in the S&P 500 this week, the energy sector was quietly raided by sellers. And therein lies opportunity. With heavy hitters like Exxon Mobil Corporation (NYSE:XOM) now resting near critical support levels, the time for a bullish rebound is nigh. Let’s take a deep dive into XOM stock and build a high-probability option trade to capitalize on its current setup.
For starters, the price trend for Exxon Mobil over the past six months has been … well, trendless. Ever since the stock peaked in mid-July last year, it has been mired in a trading range. As illustrated in the accompanying chart, the $82 zone has become a significant support level halting each and every downturn.
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And guess what? The dastardly descent gripping XOM this year is now knocking on the door of this support level.
Traders waiting for confirmation that buyers would defend their turf need wonder no longer. Yesterday’s big hammer candle proved that the bulls are indeed willing to put up a fight. The beautiful thing about stock prices leaning against key support or resistance levels is the ability it provides traders to structure low-risk, high-reward trades.
For example, if we purchased XOM stock with a stop-loss just below $82, then the risk per share is minimal. And if the mighty oil king travels even halfway to the top of its price range, we’re looking at a high-potential reward per share.
How to Trade XOM Stock Here
While equity traders could go with a straight stock purchase, options traders can play XOM stock with a bit more finesse. If you’re looking for a bit of an edge in your trade, consider using the bull put strategy.
Sell the XOM Mar $80 put for 78 cents while buying the Mar $77.50 put for 37 cents. The net credit received upon trade entry is the 41 cents and represents the maximum reward available. If Exxon stock sits above $80 at March expiration, you will capture the gain.
The max risk is limited to the distance between strikes minus the net credit, or $2.09. You will lose this amount if XOM stock sits below $77.50 at expiration. To minimize the damage, you could exit early if the stock falls below $80.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
