Exxon Stock Plunge Beckons the Bulls

With investors’ eyes fixated on interest rates, bonds, and all things Fed-related, some notable moves elsewhere might have gone unnoticed. The action in Exxon Mobil (XOM) — which has once again fallen behind Apple (AAPL) in its continuous crusade to hold the coveted “largest company in the world” title — has been uncharacteristically weak, particularly compared to oil prices.

Normally, the energy titan follows in the footstep of crude oil, which has held up quite nicely during the stock market’s recent pullback. Curiously, Exxon stock has been moving to the beat of a different drum of late. We can measure the magnitude of XOM’s decoupling with oil by assessing a correlation study.

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As a refresher, correlation measures the degree to which two securities are related. The indicator ranges between +1 and -1, where +1 is a perfect positive correlation in which both stocks always move in the same direction, and -1 is a perfect negative correlation in which both stocks always move in opposite directions.

While the correlation study has remained in positive territory for much of 2013, it turned decisively negative last week, dropping to a new low for the year at -0.76 (blue circle). Prior forays into negative territory for the XOM/oil correlation have been transitory, and the recent instance proved no different. With both securities dropping during the past three days and rising together today, it appears order and reason have been restored to the oil patch.

The recent misbehavior of Exxon stock spells opportunity, however, for traders interested in the energy sector. Assuming today’s rally sticks, it will officially end the 10-day losing streak and 10% price plunge seen over the past month. With support looming closely, this might well turn out to be a nice dip buy for longer-term players.

Normally we would expect implied volatility to be rising alongside a relentless drop in the stock as traders scurry into the options market, bidding up the price for protection, but such has not been the case with XOM. Quite the contrary — implied volatility has drifted toward the lower end of its range amid the downturn, making options fairly inexpensive.

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One way to play an eventual rebound in XOM is to buy the Nov 85 call for $3.75. The max risk is limited to the initial debit paid, and the max reward is unlimited.

With Exxon stock already at $87.25 as of this writing, the in-the-money call option boasts $2.25 of intrinsic value and a mere $1.50 of extrinsic value, which is quite low given the option provides three months of time for the stock to recover.

As of this writing, Tyler Craig was long AAPL.

Article printed from InvestorPlace Media, https://investorplace.com/2013/08/exxon-stock-plunge-beckons-the-bulls/.

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