Shares of Exxon Mobil Corporation (NYSE:XOM) were hit hard following earnings on Friday, falling the most in almost 6 years. While earnings were a disappointment, the reaction in XOM stock was a little overdone, especially given that oil prices remained fairly firm. I expect Exxon Mobil to find some support near current levels over the upcoming weeks.
The earnings report from Friday was a miss on both the top and bottom line, with EPS of 88 cents falling short of consensus expectations of $1.04. Revenues also came in light at $66.52 billion versus $74.31 billion.
The reaction in XOM stock was swift and savage as shares plunged over 5%. While I was leery of XOM and major oil stocks from my previous post on Jan. 16, the recent carnage now makes Exxon decidedly more attractive. The current P/E of 18.27 and the dividend yield of 3.64% are both far better value than the similar metrics for the S&P 500.
From a technical perspective, XOM stock is fast approaching major support at the $84 level. Exxon Mobil shares broke through this critical level intraday during the market bloodbath on Friday, trading down all the way to $83 before bouncing sharply to close at $84.53.
This type of price reversal action is many times a reliable sign that the selling may have reached a short term crescendo.
As the largest oil company in the U.S. , Exxon is highly correlated to the price of oil. While oil has fallen slightly of the recent highs around the $66 area, XOM stock has fallen much more dramatically and is now trading at a massive discount to the price of oil. The previous instance when this occurred proved to be a significant low in Exxon stock. I expect this relationship to converge with XOM outperforming oil over the next month.
Implied volatility (IV) in XOM options stands at the 100th percentile, meaning option prices are the most expensive they have been in the past year. This is even after the earnings release which normally has a diminishing effect on IV. This favors option selling strategies in trade structuring.
So to position to be a buyer of XOM stock on further weakness, an out of the money put credit spread makes intuitive sense.
XOM Stock Trade Idea
Buy XOM Feb $80 puts and sell XOM Feb $82 puts for a 50-cent net credit.
Maximum gain on the trade is $50 per spread with maximum risk of $150 per spread. Return on risk is 25%. The $82 strike price provides a 3% downside cushion to the $84.53 closing price of XOM 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 [email protected]