Tuesday’s market performance saw a rare event. The energy sector topped the leader board. It’s a spot normally reserved for tech stocks, but those were left standing outside … at least for a day. While it remains to be seen if this is the start of a more-substantial rotation into beaten-down oil names, it does provide an excuse to reassess Exxon Mobil (NYSE:XOM) stock.
As you’ll discover below, its share price has gone nowhere since May. Even though directional trades have been difficult, cash flow strategies, like covered calls and naked puts, have not. I’ll share my preferred play at the end of today’s message.
R.I.P. Oil Volatility
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It’s impossible to analyze Exxon Mobil stock without knowing what oil prices are doing. The correlation between the two is strong. It should come as no surprise, then, that crude was popping Tuesday alongside energy stocks. Oil has been interesting in its own right. Particularly when looking at its volatility.
In April, when prices were plummeting to zero (and lower!), volatility was insane. Double-digit percentage moves were happening every single day. We’ve now reached the complete opposite end of the spectrum. Momentum is dead, and there’s been virtually zero fluctuation. For six weeks, prices have been pegged at $40.
No doubt, the lack of excitement in crude is partly to blame for Exxon Mobil’s neutrality. But we’re fast approaching a tipping point. The 200-day moving average is bearing down on oil prices. At the same time, the 50-day moving average is pushing higher just below. I think a resolution of the stalemate is imminent. If the looming breakout is higher, not lower, then that should bode well for Exxon Mobil stock moving forward.
Exxon Mobil Stock Chart
The weekly time frame of XOM stock shows prices hugging the 20-week moving average. Short of the sharp pop-and-drop in early-June, Exxon shares have been holding steady near $44. On the south side, $40 is a level that must be held for the shares to maintain any semblance of bullishness. Incidentally, that makes $40 an easy stop loss level to use if you want to bail on today’s trade idea to minimize damage.
Drilling down to the daily chart reveals just how choppy Exxon Mobil stock has been in recent months. Tuesday’s rally is pulling prices back above the 20-day moving average, but the 50-day still looms overhead. For me to shift to a bull, I’d really need the stock to rise above $46. That will mark a breakout that could bring a run toward the 200-day near $54 into play.
The Best Options Trade
I don’t mind naked put trades, but implied volatility is low enough to suggest call diagonals offer a higher payday — even if the stock remains neutral. Otherwise known as a poor boy’s covered call, the bull call diagonal consists of buying a longer-term in-the-money call while selling a short-term out-of-the-money call against. It creates a profit range that yields a gain if the stock trades sideways or higher.
The Trade: Buy the Oct $40 call and sell the 4 Sep $45 call for a net debit of $3.55
Here’s what the risk graph looks like:
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The max loss is limited to the initial cost, but you can reduce the risk by exiting on a break of the $40 support zone. The estimated loss is around $140. On the profit side, consider targeting a gain of $50 to $100 per spread. The ideal scenario is to have XOM at or above $45 by Sept. 4.
For a free trial to the best trading community on the planet and Tyler’s current home, click here! At the time of this writing, Tyler held neutral options positions in Exxon Mobil.
