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Exxon Mobil Option Trader Makes Big Bearish Bet On More Downside After Oil Prices Drop Below $0

Wayne Duggan
·4 min read

Exxon Mobil Corporation (NYSE: XOM) has been one of the worst-performing large stocks in the entire S&P 500 in over the past decade, and is off to a horrendous start to 2020 thanks to COVID-19.

WTI crude oil prices plummeted more than 100% to negative $3 per barrel at the time of writing on Monday, and at least one large option trader is betting the worst is yet to come for Exxon.

The Trades

On Monday, Benzinga Pro subscribers received three option alerts related to an unusually large Exxon option trade:

  • At 9:32 a.m. a trader sold 518 Exxon put options with a $30 strike price expiring on May 8 near the bid price at 40.1 cents. The trade represented a bullish bet worth $20,771.

  • At 12:02 p.m. a trader bought 2,500 Exxon put options with a $42.50 strike price expiring on Jan. 15, 2021 at the ask price of $7.35. The trade represented a bearish bet worth more than $1.83 million.

  • At 1:04 p.m. a trader sold 661 Exxon call options with a $44 strike price expiring on Friday at the bid price of 47 cents. The trade represented a bearish bet worth $31,067.

See Also: 9 Worst-Performing Stocks Of 2020: Buy, Sell Or Hold?

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large size of the largest Exxon trade, it could represent an institutional hedge.

Exxon's Difficult Outlook

WTI crude oil prices crashed to their lowest levels in history on Monday, dropping under $5 per barrel on concerns the U.S. is running out of storage. Oil prices have plummeted as demand has completely dried up due to travel restrictions and stay-at-home orders related to COVID-19.

The spread between front month and second month oil futures contracts expanded to its widest level in history, and May WTI futures contracts even briefly dipped into negative territory for the first time in history.

Earlier this year, analysts at Redburn estimated Exxon needs crude oil prices of around $74/bbl to cover costs.

Despite the historic weakness in the oil market on Monday, Bank of America analyst Doug Leggate raised his price target for Exxon from $62 to $70 and reiterated it as a top stock pick for yield investors.

“While the players have changed, we continue to see the 1998 oil crisis as the playbook to advocate layering exposure across the energy sector,” Leggate said in a Monday note.

Monday’s sell-off pushed Exxon’s dividend yield to 8.3%. Earlier this month Exxon announced a 30% cut to its 2020 capex, prioritizing its dividend yield and balance sheet in the near-term.

Bullish sentiment among StockTwits messages mentioning Exxon was at 62.3% on Monday, down from its 2020 high of 91.8% on Jan. 15.

  XOM Chart by TradingView new TradingView.widget( { "width": 680, "height": 423, "symbol": "NYSE:XOM", "interval": "D", "timezone": "Etc/UTC", "theme": "light", "style": "1", "locale": "en", "toolbar_bg": "#f1f3f6", "enable_publishing": false, "allow_symbol_change": true, "container_id": "tradingview_93501" } );

See Also: How To Read And Trade An Options Alert

Benzinga’s Take

The bad news for Exxon bulls is that the puts purchased on Monday don’t expire until January of next year, suggesting the large buyer doesn’t expect a share bounce-back anytime soon.

The break-even price on the puts is $35.17, meaning Exxon’s share price would need to drop at least another 15.7% from here for the put buyer to break even on the contracts.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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