Crude oil has had an incredible rally since the end of August. It is now almost 14% higher, and with increasing momentum. This comes at the heels of another rally that started towards the end of June. So in all and since then, crude is almost 25% off the lows.
But there could be more to come because it recently crossed above a lower-high descending trend line, which usually means that they’re going to overshoot to the upside. But fundamentally I think that oil will run into resistance from OPEC. The higher the price the more market share they will lose.
Like oil, Exxon Mobil Corporation (NYSE:XOM) also made a huge comeback and I want to profit from it. Not from the remaining upside, but rather from the bottom they established. Normally I don’t chase rallies this long in the tooth, so from here I make sure I don’t need more upside to profit.
XOM stock continues to lag that of Chevron Corporation (NYSE:CVX) but they have both mounted strong rallies of late. Both stocks have rallied for almost two months. However, I am most interested in the floor that Exxon Mobil stock developed. As it fell from grace, XOM fell to $76 per share. Then it reversed course on a dime and with conviction without much help from outside factors. This is important because it tells me that sellers were exhausted.
Click to Enlarge The support at $76 also coincides with the technical target of the breakdown that started $7 higher. I do recognize that of the two, CVX looks more technically promising with regards to upside targets. But since I’m not chasing a rally today, I’m going to trade the one that seems to have less downside potential. That one would be Exxon.
Since CVX rallied farther, it now has much further to fall to clear support. Furthermore, XOM is still cheaper than Chevron. So it only makes sense that I risk my money on a better-valued stock.
So in today’s trades I’m committing to going long Exxon but with no money out of pocket. I will bet that the bottom in XOM for 2017 has already been set, so I’m confident in selling downside risk against my support levels. This gives me room to breathe in case the price reverts lower between now and the end of the year.
This is different than buying the stock and then hoping for rallies so I can profit. In my scenarios I will profit for as long as XOM does not fall more than 11%. I do have to recognize the risk that oil prices are now extended into their short term range which could create some downside pressure on XOM if they correct a bit.
XOM Stock Trade Idea
The Trade: Sell the XOM Jan $72.50 put and collect 70 cents per contract to open. This is a bullish trade that has an 85% theoretical odds of winning. But I will accrue losses if the price falls below $71.80 per share.
If margin is an issue, I can mitigate my risk by selling a spread instead of naked puts.
The Safer Bet: Sell the Jan 2018 XOM $75/$72.50 credit put spread where I can yield 13% on risk and with about the same theoretical certainty.
It is important to note that I don’t need a rally to profit from either set-up. As long as XOM stays above my strikes, I retain maximum gains. There is no out-of-pocket expense to open either of these trades.
Investing in stocks is risky, so I never bet 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 as @racernic on twitter and stocktwits.