While the stock market is still trading near all-time highs, oil prices and energy stocks have failed to join the party. The recent price action in oil has shown glimmers of hope, however, as the critical $43 support level has held. The three largest U.S. oil stocks — Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX) and ConocoPhillips (NYSE:COP) — are also showing signs that the worst may be over, at least in the short term.
Using crude oil futures to play for a bounce in oil prices can be a risky proposition, to say the least. Outright stock purchases of the Big Three oil companies also risky and ties up a fair amount of capital.
Fortunately the options market provides a lower-risk, lower-cost way to position in a guardedly bullish manner by employing a bull put spread strategy.
Today, I want to show you how to structure a trio of trades on the Big Three using shorter-term July monthly options. We’ll use major support to keep us safe and define our risk, while positioning us for profits should prices — and these energy stocks — head higher.
In no particular order …
Safe Ways to Play Oil Prices: Exxon Mobil (XOM)
Click to Enlarge As the largest U.S. oil producer, Exxon Mobil embodies Big Oil. Current Secretary of State Rex Tillerson is a former CEO of Exxon, which should provide some definitive benefits for both XOM and oil generally from a government regulatory standpoint.
The current dividend yield of 3.8% also looks attractive when compared to the 10-year Treasury rate of 2.1%.
XOM stock is looking ripe for a bounce from a technical perspective. Shares held the crucial $80.50 level on several occasions.
The Trade: Bull Put Spread. Buy the Jul $78 put and sell the Jul $80 put for a 35-cent net credit.
The maximum gain is $35 per spread with maximum risk of $165 per spread. Return on risk is 21.2%. The short $80 strike price is below the major support level at $80.50 and provides a 1.5% downside cushion to the $81.24 closing price of XOM.
Safe Ways to Play Oil Prices: Chevron (CVX)
Click to Enlarge Even with a huge earnings beat last quarter ($1.41 versus 85 cents consensus), shares of Chevron still haven’t gotten any respect. The oil giant’s market capitalization is now below $200 billion, but the dividend yield is above 4%.
Goldman Sachs at least has some sense, still featuring CVX on its Conviction Buy list.
A technical take shows Chevron holding major support at the $104 area as oil prices have firmed.
The Trade: Bull Put Spread. Buy the Jul $100 put and sell the Jul $102 put for a 40-cent net credit.
The maximum gain is $40 per spread with maximum risk of $160 per spread. Return on risk is 25%. The short $102 strike price is below the major support level of $104 and provides a 2.05% downside cushion to the $104.14 closing price of CVX.
Safe Ways to Play Oil Prices: ConocoPhillips (COP)
Click to Enlarge The recent resumption of coverage of ConocoPhillips by Goldman Sachs with a neutral rating sent COP shares lower.
Within the note, however, Goldman Sachs analysts lauded the company for cost cutting efforts. I also want to point out that Goldman’s analysts have a $52 price target on the stock.
Meanwhile, ConocoPhillips also is increasing its stock buyback program this year, which should support shares.
Major support looms at the $44 level from a technical perspective, as shares have twice breached it briefly before rallying sharply.
The Trade: Bull Put Spread. Buy the Jul $41 put and sell Jul $43 put for a 45-cent net credit.
The maximum gain is $45 per spread with maximum risk of $155 per spread. Return on risk is 29.03%. The short $43 strike price is below the major support level of $44 and provides a 2.78% downside cushion to the $44.18 closing price of COP.
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 timbiggam@gmail.com.
