Last November crude oil finally broke through the $55 resistance and enjoyed a 20% rally into January. Unfortunately, it all came crashing down in February as it retraced most of the greens. But crude it still is above the neckline, so oil bulls have the chance to establish the November breakout zone as forward support. So not all is lost.
Oil stocks like Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) also enjoyed a similar rally but unfortunately for the stocks, their correction from the January highs have been much harsher. That is due to the fact that we also had a global flash correction so the pain was amplified. XOM stock fell 16% from the high, CVX fell 19%, so the pain for investors has been tremendous.
My overall view on stocks is cautiously bullish, so under this assumption this presents me with an opportunity to profit long oil stocks. And today I choose to go long XOM stock on a fundamental basis.
Fundamentally, XOM is cheap with a trailing price-earnings ratio under 17. So owning it at a discount from here is not likely to be a mistake in the long term. This is a proven survivor stock of many correction and flash crashes. Dips in the long term are buying opportunities.
Technically, Exxon stock hit a decade-long basing zone. So unless we get a market-wide stock crash this should hold as support and therein lies my opportunity. I want to bet that the base will hold for the next few months.
XOM has found footing above $65 per share for the past ten years. Before then, that area had been resistance and since has served as support. So it is unlikely that it loses it this year for it to become a forward point of failure once more. So I am confident that if my trade sours and I am put the stock that I would be able to manage further profits out of it.
Expectations are important and Wall Street sides with me. XOM stock is trading 11% below the average price target. So I expect analysts to stand by their forecasts and perhaps even get a few upgrades from “hold” to “buy.” Nevertheless, I don’t need a rally to profit. As long as XOM stays above my support then I retain my maximum gains.
The Trade: Sell XOM June $65 naked put. This is a bullish trade where I collect $1 to open. Here I have a 85% theoretical chance of success. But if price falls below my strike then I accrue losses below $64.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell XOM June $67.50/$65 bull put spread where I have the same odds of winning. Then the spread would yield 20% on risk.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free 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.
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