It’s no secret, the world’s largest energy company, Exxon Mobil Corporation (NYSE:XOM), has been a “low energy” situation for XOM stock investors. But can a price drilling and rising geopolitical risks offer a new trick for this Dog of the Dow? Let’s take a look at what’s happening off and on the XOM stock chart and then offer an options strategy to support our view.
If during late 2016 or in 2017 you bought into the notion the Trump administration’s energy agenda or production cuts by OPEC should act as supports for XOM stock, it probably hasn’t been a good year for your investment.
A quarterly payout of 0.92% to shareholders has been no match for a decline in XOM stock of nearly 9.5% this year. Exxon Mobil’s performance has also been a dog compared to the Dow’s own gain of 4%. But could the price shellacking in XOM stock have finally reached bottom and a possible turning point?
Increased geopolitical risks from the likes of North Korea, Syria and Russia sound supportive of tighter supplies, rising oil prices and in turn a boost for Exxon Mobil and XOM stock. There’s also that steady yield to consider as investors turn toward safer and typically less volatile returns in this type of environment.
XOM stock is a Dividend Aristocrat. The company has paid investors regularly for more than a century. What’s more, Exxon Mobil has secured its status as dividend royalty by increasing its dividend for 34 years straight — and one that’s currently offering an above-market payout of 3.67%.
Bottom line, XOM stock offers an opportunity to buy into a very well-managed and well-funded company whose prospects, through both its own efforts and macro environment, should begin delivering positive total returns for its investors after a few doggish years of underperformance.
XOM Stock Weekly Chart
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Technically and as the weekly chart of Exxon Mobil illustrates, testing during late February into March of Exxon’s 50% retracement level has remained intact. The challenge has been supported by the completion of a Fibonacci-based mirror move or two-step pattern denoted by matching legs AB and CD. Overall, that’s bullish for shares.
What’s also nice to see and constructive for higher prices is XOM stock’s stochastics curling higher from an oversold condition. If there’s any bad news it would probably have to be the fact shares did try to rally from a couple bottoming candlesticks and have thus far failed to hold those gains.
Exxon Mobil Stock Modified Collar Strategy
Given the overall bullish view for XOM stock and being attracted to the energy giant’s income stream, I like the idea of approaching Exxon Mobil with a modified collar strategy. Reviewing the XOM options and shares at $81.70, selling the 26 May $85 call, purchasing the 26 May $80/$77.50 put spread and buying shares is priced for a net debit of $81.90.
What’s this combination entitle the XOM stock investor too? On top of being in position to receive the next quarterly dividend, the 20 cents of extra premium affords up to $2.50 or more than 3% protection below $80 at expiration, if shares fail to hold technical support.
The trade-off for this protection is it is limited. Below $77.50 in Exxon Mobil and a decline of 5%, the partial insurance coverage offered by the bear put spread has been effectively exhausted.
Secondly, this type of insurance is also slower to gain its maximum hedge value. However, the spread’s hedge value does typically work well enough in lower volatility stocks like XOM.
Considering the sizable decline, XOM stock’s underperformance relative to the market, and hold of key chart support, this type modification trumps using a regular collar in our estimation.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
