With oil prices looking like they’ve hit a bottom after putting in a big reversal off the lows yesterday, Exxon Mobil Corporation (XOM), the largest integrated oil company in the U.S., is poised to follow suit.
While not expecting a rip higher in Exxon Mobil stock, I think the combination of a hefty dividend and rich option premiums, along with a tempered bullish outlook, sets up for an ideal covered call trade.
The price action in oil yesterday signifies a short-term low in oil prices, with crude making a new low at $36.64 before rebounding to close higher on the day at $37.85.
This major reversal was also accompanied by big volume and a spike in implied volatility, also the hallmarks of a significant low.
Exxon Mobil stock, which is highly correlated to the price of oil, should also begin to find support around the current closing level of $74.63. The 9-day RSI reading of 23.96 indicates a deeply oversold condition in XOM stock.
The last time XOM was this oversold on a 9-day RSI basis was late August, which marked the low in Exxon Mobil stock price. The spike in implied volatility over the past few trading sessions also points to a bottoming in XOM.
Exxon Mobil stock has a dividend yield of 3.9%, well above the 10-year U.S. Treasury yield of 2.24% and nearly double the S&P 500 yield of 1.93%. With a fortress balance sheet and a diversified business mix, the dividend in XOM is safe, especially given its enormous free cash flow.
How to Trade XOM Stock
With the recent spike in implied volatility, option prices in XOM are trading near their highs, making option selling strategies comparatively attractive. To capture the rich option premium and the nearly 4% dividend, a covered call trade structure can be employed.
With the next ex-dividend date in XOM stock in early February of 2016, I would look to buy XOM stock at $74.63 and sell the April $77.50 calls at $3.10 for a net debit of $71.53.
The short call strike of $77.50 is structured near the resistance level in XOM stock of $77, while the net debit paid of $71.53 equates to the $72 support level. The short call provides a 4.15% downside cushion to the share prices, with the overall covered call trade having a 5.13% standstill return to April expiration (15.34% annualized).
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
