Aside from a strong January, the stock market has had a tough year. We’ve had two corrections since February. Surprisingly, crude oil prices have held relatively well. Unfortunately the same cannot be said for oil stocks.
Exxon Mobil Corporation (NYSE:XOM) stock is down 14% in the past three months. Even though the fundamentals around the energy sector have been somewhat stable, XOM stock has languished, giving up 10% in 12 months.
This is not so much a sign of deteriorating fundamentals, but rather a lack of upside catalyst. Not too long ago Goldman Sachs said that they saw an upside in crude oil prices to $80 per barrel. I completely disagreed.
For energy prices to rise that much, it would take extraordinary moves in currency, global growth or massive spikes in geopolitical unrest. Frankly I see none of these occurring in the short-term.
So you think today I’m sharing a bearish Exxon stock trade given the lack of upside thesis that I just cited. On the contrary, today I am sharing a bullish trade but one that does not require upside momentum to profit.
Exxon stock, in the long run, has been relatively stable. This is a massive company with solid management that rarely gives investors specific reasons to sell for an extended period of time. They have had their share of headlines but none of the late. Consequently, I am confident that proven support levels will continue to hold in the stock this year. And therein lies my opportunity.
My trade will create income out of thin air and all I need to retain my maximum gains is for XOM shares avoid a bear market correction from current prices. Otherwise I will own shares but at a huge discount, at which point the value in Exxon stock will be high enough for me to be able to turn a profit with them in the long run.
Technically speaking, XOM has had a consolidation zone around $61 per share where I can risk money for relatively easy profit. This has been a pivot area for over a decade. Such long-term pivots usually require unusual events to fail. I see none likely for the near term.
In other words, I am confident that XOM stock will give me a chance to defend my positions should price go against my trade.
Exxon Stock Options
The Trade: Sell XOM October $60 put and collect 70 cents per contract to open. I have an 85% theoretical certainty that I retain maximum gains. Otherwise, I will accumulate losses below $59.30.
Selling naked puts is daunting especially in these unstable markets. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell XOM October $65/$60 credit put spread. The spread has the same odds but would deliver 15% yield on risk. Neither trade requires a rally to profit.
Get my free newsletter and subscribe to my YouTube channel 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.
