This week Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) stock fell on earnings reactions. The debate remains heated about valuation and potential entry points into energy stocks. Regardless of their fundamental and operation perspective, I do know a bit about their environment.
Crude oil is stuck in a range, but we know that OPEC is done fighting the West for market share through lower prices.
So the days of expecting $30 per barrel price are gone. For now, $50 (which once was resistance) is forward support. Even if the natural support at $50 fails, OPEC set in place a safety net in the mid-$40s by announcing a historic production-cap deal.
Furthermore, XOM and CVX are two giants in their field. They will be survivors even if we get another sector-wide drop. Financially they are solid, with dependable yields that, in times of trouble, defend their respective stock prices.
I know I sound bullish XOM and CVX, but I’m not. Even though I don’t expect a disaster, I don’t have faith in the breakout potential either. Yes, technically I see it on the charts, but for now I also see that $55 has become the new $50 resistance for crude oil prices.
So this leaves me with only one option (pun intended) that sounds attractive to me: Sell someone a losing lotto ticket in XOM and/or CVX options.
There are hundreds of ways to accomplish this so here are a few that called my name:
The Bet on XOM: Sell the XOM Jan 2018 $60 put. This is a bullish trade for which I collect $1.40-ish in premium. This trade has a 90% theoretical chance of success with a 25%-plus buffer from today’s price.
The Bet on CVX: Sell the CVX Jan 2018 $72.50 put. This is a bullish trade for which I collect $1.60 in premium. This trade has a 90% theoretical chance of success with a 33%-plus buffer from today’s price.
(Warning: I only sell naked puts if i am willing and able to own the stock at the strike sold.)
Since selling naked puts is not for every risk profile, I can modify the trades to better suit less aggressive tastes.
The Alternate on XOM: Sell the XOM Jan 2018 $62.50/$60 credit put spread. This is a bullish trade for which I collect 25 cents per contract to open. This trade has a 90% theoretical chance of success with a 11% yield and same buffer from today’s $84 price.
The Alternate on CVX: Sell the CVX Jan 2018 $75/$72.50 credit put spread. This is a bullish trade for which I collect 20 cents per contract to open. This trade has a 90% theoretical chance of success with a chance to yield 9% on money risked.
These are long dated trades so there is not a rush to open. They also require that markets in general not correct this year. I am not required to hold these open through expiration. I can close at any time for partial gains or losses.
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 on Twitter at @racernic and stocktwits at @racernic.
