Last fall when Exxon Mobil Corporation (NYSE:XOM) fell hard, I wrote on how to catch a falling machete. The trade was profitable and I have since booked it. On this dip, I want to reload the same setup for the opportunity for more profits.
I am not one who likes to reinvent the wheel, so I will retrace my steps almost exactly from the last time I traded XOM stock.
Since my last trade, oil prices overcame the $50 crude oil resistance price and established it as support. But they still haven’t lived up to the entire upside measured move that should have taken out $58 per barrel. So crude oil prices are now stuck in a range.
One major development since last fall is that OPEC is now committed to defending energy prices, so I don’t anticipate oil falling too far. Consequently, I view any weakness in XOM stock as temporary and that buyers will step in to defend XOM stock.
Click to Enlarge Fundamentally, XOM and Chevron Corporation (NYSE:CVX) are giants with little worry over their viability. However, technically XOM is at a must-bounce level. Else, and if it loses current levels, it could invite more technical sellers and retest $79 per share.
This is not a forecast, but I do have to acknowledge it as a possibility.
XOM Stock Trade Idea
The Trade — Long XOM: Sell Jan 2018 $65 put. For this I collect $1.5 per contract to open. I only sell naked puts if I am willing and able to own the stock at the strike sold. I need XOM stock to stay above my strike sold. I have a 90% theoretical chance of success with this 21% buffer from current price. My breakeven price is $63.50 per share.
I chose $65 per share because it gives me room for error and it puts my risk below recent lows.
Selling naked puts is not appropriate for all investors. Luckily, I can modify the trade to better suit more conservative risk tastes.
The Alternate Trade — Less Aggressively Long XOM: Sell the Jan 2018 $70/$67.50 credit put spread. This is a bullish trade for which I collected 40 cents per contract to open. I have a 95% theoretical chance of success to yield 17%. I have to note that the tradeoff for having a limited loss, this trade has a slightly smaller price buffer from current levels.
I am not selling opposing credit spreads to hedge the trade. Instead I will closely manage the risk. I don’t like to sell credit call spreads after a sharp drop in price like XOM has recently had.
I can close it at any time for partial gains or losses. I may need to manage this risk through future earnings reports. The short-term price reactions earnings report are often a coin flip.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and StockTwits at @racernic.