With North Korea rattling sabers, the conflict in Syria growing hotter and tensions in the Middle East rising, geopolitical turmoil is on the rise. And that means a return to safe-haven investments for traders and a potential crimp in global energy supplies.
While gold is the ultimate safe haven bet for troubled times, oil is a very close second in terms of investing power. And while there are several options for betting on a turnaround in the energy sector, there are few better barometers for the oil market than Exxon Mobil Corporation (NYSE:XOM) and XOM stock.
Click to Enlarge After hitting a low near $38 per barrel in January last year, oil futures have marched steadily higher to rest near $53 per barrel this morning. Unfortunately, XOM stock hasn’t seen the same kind of love from investors. After enjoying a nice Trump bump following the November election, Exxon Mobil has declined roughly 8% so far in 2017.
But the stock is beginning to show some signs of life in the midst of rising geopolitical tensions. XOM has added about 3.5% since its March lows near $80 and has even pulled its 10-day and 50-day moving averages into a bullish cross — a technical formation that often brings additional buyers to the table.
Exxon Mobil has one significant short-term hurdle left to overcome in the $84-$85 region, and guidance from the company’s April 28 earnings report could provide just the spark XOM needs to break out.
For the record, Exxon Mobil earnings are expected to come in at 89 cents per share, more than double year-ago results of just 43 cents per share. Additionally, revenue is seen soaring 39.4% to $67.9 billion year-over-year.
Historically, Exxon Mobil has a habit of topping the consensus estimate, meaning Wall Street will be more focused on the company’s guidance. With oil prices already in an uptrend, it could signal a positive outlook for XOM for the rest of 2017.
On the sentiment front, there is plenty of room for growth. According to data from Thomson/First Call, XOM stock has attracted just five buy ratings, compared to 15 holds and six outright sell ratings. What’s more, the 12-month consensus price-target of $87.27 represents a meager premium of just 5% to yesterday’s close. In other words, there is ample room for potential upgrades or price-target increases.
Turning to the options pits, we find a bit of trepidation from XOM options traders. Currently, the April/May put/call open interest ratio arrives at modest reading of 0.75 as traders worry about stabilizing oil prices. However, this ratio dips sharply to 0.48 for the 28 April series — i.e., those options most affected by Exxon Mobil’s quarterly report.
Overall, 28 April implieds are pricing in a potential post-earnings move of about 2.5% for XOM stock. This places the upper bound at $85.38, while the lower bound lies at $81.12. A breakout above $85 would be a confirmation of XOM’s current bull trend, while a pullback to $80-$81 could mean more consolidation for the shares..
2 Trades for XOM Stock
Call Spread: For those traders looking to capitalize on post earnings rally for XOM stock a May $85/$87.50 bull call spread has considerable potential. At last check, this trade was offered at 52 cents, or $52 per pair of contracts. Breakeven lies at $85.52, while a maximum profit of $1.98, or $198 per pair of contracts, is possible if XOM stock closes at or above $87.50 when May options expire.
Put Sell: Alternately, if you’re not sold on an Exxon Mobil rally, you could look into a bull put sell position. Along those lines, a 28 April $81 put sell might be a way to capitalize on XOM’s strong technical backdrop.
At last check, the 28 April $81 put was bid at 50 cents, or $50 per contract. The upside to this put sell strategy is that you keep the premium as long as XOM stock closes above $81 when these options expire. The downside is that should Exxon Mobil trade below $81 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $81 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
