Exxon Mobil Corporation (NYSE:XOM) has been on a major bull run to start the year with Exxon stock now at the highest levels since this same time last year. Oil prices have followed a similar path to as both light sweet crude and Brent oil have risen to recent highs.
The rallies in both oil and oil stocks are beginning to show definite signs of fatigue from both a fundamental and technical viewpoint. I look for XOM to begin to consolidate at current levels.
From a technical perspective, XOM is getting decidedly overbought. Nine-day RSI recently breached the 80 level for the first time in the past six months.
The price action Friday, with Exxon shares making a move toward $88 before pulling back sharply, points to a reversal pattern and likely signals difficulty for Exxon stock moving forward.
Oil prices are also looking overdone technically. Crude futures are at well over an 80 reading on a 9-day RSI basis, by far the most overbought in the past six months. While the uptrend remains intact, oil prices are starting to trade a massive premium to the trend line.
Previous instances when crude futures were so exuberant lead to a pullback back to the trend line. I expect oil to trade sideways at best over the coming month. Important to also remember that higher prices in oil become self-correcting, as shale and other energy sources become increasingly more viable.
Valuations are also beginning to look a little overdone for Exxon stock. The current P/E for XOM is 28.5, which is a premium to the industry (28.1) and the S&P 500 (22.9). It is also well above the 5 year average for XOM of 19.9.
Price-to-sales also shows a similarly rich valuation comparison. Certainly, any further price appreciation in XOM will be predicated on organic growth and not multiple expansion.
Implied volatility (IV) in XOM options currently stands in the 78th percentile meaning option prices are comparatively expensive, favoring option selling strategies. So to position for a stall out in the most recent run-up in Exxon stock a bearish call credit spread makes intuitive sense.
Exxon Stock Options
Buy XOM Feb $92.50 calls and sell XOM Feb $90 calls for a 35 cents net credit.
Maximum gain on the trade is $35 per spread with a maximum loss of $215 per spread. Return on risk is 16.27%. The short $90 strike price provides a 2.83% cushion to the $87.52 closing price of Exxon stock.
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.
