The nomination of Exxon Mobil Corporation (NYSE:XOM) CEO Rex Tillerson as Secretary of State should be a boon to Big Oil and XOM stock in particular over the coming months. With crude oil looking to have held the $50 dollar level post-OPEC and Exxon Mobil trading at a discount to oil, I look for XOM stock to outperform over the intermediate term.
While the Trump cabinet picks had certainly been pro-oil before Mr. Tillerson’s nomination, having the CEO of the biggest oil company in the U.S. as Secretary of State further cements the Big Oil mantra adopted by the Trump administration.
As Secretary of State, Mr. Tillerson will certainly be able to represent the interests of both the U.S. and Exxon Mobil as he travels the world. This will most assuredly be a benefit for XOM stock, combined with the new era of less energy regulation that President-elect Trump hopes to enact.
Click to Enlarge The OPEC decision to reduce output, at least near term, has provided a floor for oil prices generally. The key $50 level held and was the impetus for a sharp rally. I expect oil to stay above the $50 level over the near term, which will be supportive of oil producers like XOM.
Certainly XOM has enjoyed a nice rally since Trump was elected, but it is still trading at a significant discount to the normal relationship with crude.
As the chart below shows, Exxon Mobil is normally highly correlated to oil prices, which makes sense, but recently that correlation has diverged. Oil prices are at yearly highs while XOM stock is still well below the highest levels of the Year.
Click to Enlarge I expect this divergence to realign, with XOM being a relative outperformer to oil over the coming months.
Option prices, or implied volatility (IV) are also near the lowest levels of the year, which favors long volatility strategies. So to position for a continuation of the rally in XOM stock, a bull call spread is the way to play.
The Exxon Mobil Trade Idea
Buy the XOM Jan $90 calls and sell the XOM Jan $95 calls for about a $2 net debit.
These options are the traditional monthly options that expire Jan. 20. The maximum risk on the trade is $200 per spread, with a maximum gain of $300 per spread, or 150%, if XOM closes above $95 on January expiration.
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.
