Shares of Exxon Mobil Corporation (NYSE:XOM) have tumbled about 14% over the past five trading sessions and as a result have now reached a critical area of technical support. This, coupled with a healthy dividend yield, is increasingly making XOM stock an interesting target for a long-side entry.
When Exxon Mobil reported its latest batch of earnings last week on Feb. 2, the earnings miss was not well received by investors and the stock promptly gapped lower, setting in motion a steep multiday decline. In addition to the weak numbers investors are concerned over rumors that the company may have conducted business with Russian persons that are on U.S. sanction lists.
This sharp multiday drop in XOM stock not only brought it to a technical support area but also spiked its dividend yield, as well as the implied volatility of options prices.
Moving averages legend: red – 200 month, blue – 100 month, yellow – 50 month
For some perspective let’s look at a longer-term monthly chart of XOM stock. Here we see that the monthly bar for February thus far has pushed the stock to the longer-standing up-trend line. While this alone is no reason to buy the stock and the month is far from over, this helps us to gain some perspective on reward to risk.
As the price of XOM stock dropped in recent days, its dividend yield has moved higher to a current 4%. Although interest rates in general have also risen, a 4% dividend yield is still an attractive feature in the current environment, particularly for a mega-cap stock such as Exxon Mobil.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart the steep multi-day drop in XOM stock is more apparent. Note this drop now has the stock at a previous area of horizontal support in the mid $70s from August of last year.
Although active investors or traders could consider buying some XOM stock here at oversold readings for a bounce, options traders likely have even better risk to reward. Why? Note the sharp rally in implied volatility (bottom of the chart). This implied volatility spike could now allow option sellers to take advantage of selling “expensive options.”
One idea would be to sell April $75-$70 put spreads which at the moment would make money by April expiration if the stock stays above $73.40, which is about another 3.50% lower from yesterday’s closing price.
Check out Anthony Mirhaydari’s Daily Market Outlook for Feb. 9.
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