Since April, energy prices have been pivoting around an important level that dates back to January 2015. While oil prices are range bound, they don’t lack excitement. The moves have been violent, but somewhat predictable. Almost every arrow we drew on our chart was realized. The $50 per barrel roof and the low $40 floor have held. Exxon Mobil Corporation (NYSE:XOM), however, has had a rough September.
Click to Enlarge XOM stock broke down from its August price range, while crude oil and other energy companies held theirs.
Although Exxon is a well-managed company with proven fundamentals, recent headlines of accounting shenanigans are to blame for the XOM stock slump.
In the past year, XOM stock performance has seriously lagged that of Chevron Corporation (NYSE:CVX). Usually, accusations of accounting impropriety keep me away from a stock, but in this case, XOM is big enough that I think will overcome it soon enough.
Primary Trade — Long XOM: Sell the Dec $77.50/$75 credit put spread. This is a bullish trade for which I collected 50 cents per contract. If successful, this trade will yield over 20% yield with an 80% theoretical chance of success. This trade has 6% buffer from current price. For those who would prefer a bigger moat around price can modify this trade to have a larger price buffer. The trade off would be to put more dollars at risk but at a somewhat safer distance from current price.
Click to Enlarge Alternate Trade — Long XOM: Sell the Nov $75/$70 credit put spread. This is a bullish trade for which I collected 40 cents per contract. If successful, this trade will yield 9% yield with a 90% theoretical chance of success. This trade has a 9% buffer from current price.
Why Use Options? Compare these with buying Exxon at the current stock price and putting $82.50 per share in immediate harm’s way. Using the options market gives me a healthy buffer from the current price and a defined lower-risk profile.
Typically, I sell opposing credit spreads to hedge the trade. In this case, I will instead opt for sticking to tight stops. Since XOM stock has had a sharp drop of late, the credit call spread premiums are too weak. They would place me in the face of danger in case of a rebound. I can add the credit call side at a later date if price rises enough for it to make sense.
I am not obliged to hold this trade into its expiration date. I can close it at any time for partial gains or losses. I do have to acknowledge, however, that I would need to manage this risk through an earnings report in October. 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.