When Exxon Mobil Corporation (NYSE:XOM) corrects, I like to bet long on the price action. Case in point was when it fell last year, I shared a trade to catch a falling knife. This wasn’t a fluke, since in February of this year I shared another trade that created income from thin air.
I only do this with worthy stocks. Fundamentally, XOM stock is as solid an energy name as they come. The recent malaise is mostly due to a severe correction in energy prices, not due to Exxon-specific issues. Crude oil fell 15% in under a month.
Such downside pressure is inescapable for XOM stock in the short run. In the long run, the company’s fundamentals should slow the correlation effect to crude. Exxon and Chevron Corporation (NYSE:CVX) are sector leaders and they will weather this storm like they did the last one.
I do have to acknowledge the possibility that if oil falls into the mid $30s, then there will be talks of cutting dividends. Should that happen, I believe that XOM stock along with all other dividend payers will fall hard on the news. They may even retest the August 2015 flash crash.
Click to Enlarge I am pointing out the potential pitfalls to illustrate the negative scenarios against which I will sell risk today to generate income. When the negative scenarios are hogging the media stream, I am willing to leverage them. But the trick is to find proven support levels that will hold in most cases.
Technically Exxon stock has been consolidating in this zone for weeks. This usually is better news for bulls than bears. They can then use this base to remount rallies. But the danger is if we get a doomsday headline, then the break lower from here could be violent.
For my trade setup today, it is important to note that if XOM stock falls another 15% from here, I am willing to temporarily own it.
XOM Stock Trade Idea
The Bet: Sell the XOM Oct $72.50 puts naked and collect 70 cents to open. Here I have a 90% theoretical chance of keeping my maximum premium for gains. But if XOM falls below my strike then I will own the shares. I will accrue losses below $71.8.
If I am not willing or able to own the XOM shares then I should use credit spreads instead.
The Alternate Bet: Sell the XOM Oct $72.50/$70 credit put spread. Here I have about the same chance of success but with much more limited risk. Yet the spread can still deliver 8% in yield.
Selling options is risky business so I never risk more than I can afford to lose.
Learn how to generate income from options here. 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.
