After a bit of misplaced price drilling in Exxon Mobil Corporation (NYSE:XOM), shares are quickly back in good standing with Wall Street, both off and on the price chart. But if you’re considering some exploratory buy-side operations of your own in XOM stock, a modified bullish collar is a good business practice for risk-averse investors. Let me explain.
As market bulls might now tell you with added confidence, Tuesday’s single-session setback doesn’t make a trend. And with fears over the state of Italian politics quickly abated and the Dow Jones Industrials reversing nearly all of the prior day’s loss, the case for an emerging uptrend is building. Leading the charge with even greater vigor was constituent and energy giant XOM stock.
Shares of Exxon spiked up by almost 4% Wednesday courtesy of additional support from the energy market. Crude oil jumped sharply higher Wednesday following confirmation recent output cuts by OPEC would remain intact.
The turnaround comes on the heels of a couple of weak sessions tied to increased production worries resulting from output losses by Iran and Venezuela. Now and with XOM stock back in bull territory above the 200-day simple moving average; what could possibly go wrong or right? I’m glad you asked.
XOM Stock Monthly Price Chart
When I last wrote about Exxon stock, I had turned bearish after enjoying a nice, but brief stay in the bull camp stemming from a completed Gartley reversal pattern in October. The change of view occurred in early February following a failure of Exxon to break above a key resistance line dating back to Exxon’s 2014 highs.
In our estimation the bearish trend-line should have been broken and reaffirmed the pattern low in XOM stock as a meaningful one. The caution turned out to be warranted as Exxon proceeded to hit new lows beneath the Gartley pattern. But then a funny thing happened. XOM pulled a fast one, or as quick as price action gets on the monthly chart — and reversed course higher.
The bullish about-face from the April low established a lower-low double bottom from the finished Gartley pattern with the price action successfully holding above the 62% retracement level. In conjunction with a supportive stochastics set up on the monthly, I’m optimistic XOM stock is on its way to another challenge of resistance and eventually a breakout to new highs.
XOM Stock Modified Collar
Reviewing XOM stock’s options I like the idea of positioning with the use of a modified collar. Specifically and with shares at $81.50, buying stock in conjunction with selling an out-of-the-money September $87.50 call and purchasing the September $77.50/$70 put spread is attractively-priced for $81.63.
What does this combination entitle an Exxon stock investor too? On the downside, the 13 cents of premium paid affords up to $7.50 or nearly 10% of protection against any potential downdrafts below $77.50 at expiration. That coverage lines up fairly well with the fore-mentioned 62% Fibonacci support near $71. Nice, right?
The truth is the ability to have this limited, but fairly well-placed insurance policy does come with a cost. In this case the trader has sold the $87.50 call to finance nearly the entire cost of the put spread. Thus, profits in XOM stock are initially capped at the strike.
Of course, that gain amounts to a decent return of 7%. In addition, factor in a quarterly dividend of about 1.25%, as well as the shorted call strike placed near XOM’s still intact resistance line; and that’s a fairly attractive risk-adjusted return worthy of bullish investors’ attention.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
