Exxon Stock Is Packed Full of Easy Profits in 2018
Last February, the stock market had a sharp correction from fears of runaway interest rates. Usually a spike in rates causes a crimp on business activity, thereby negatively affecting the corporate P&Ls. In addition to the February market-wide fears, Exxon Mobil (NYSE:XOM) stock had its own reasons to fall over 20% from an earnings event.
So the XOM investors woes were worse than the equities in general. Furthermore, the bounce in XOM stock has merely been to recover half of the first quarter 20% correction. The $84-per-share area has been a recent roof and a point of failure.
But there are some positives to take away from this 2018 price action. The February event was sharp and served as a real test of the $72-per-share support band. This most likely shook off all of the weak hands in the stock. Meaning XOM may have shed as much froth as possible, leaving the current prices more solid than they were at $88-per-share in late January.
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There is concern that XOM stock hasn’t benefited from the rise in oil prices. And that could put it at a disadvantage if oil makes a correction. A saving grace here is that the U.S. dollar has been very strong, so if it eases a bit, it could help prop crude oil up.
So all that said, the XOM stock price may have set a floor for 2018. And therein lies the opportunity today.
Fundamentally, it is not screaming cheap at price-to-earnings ratio of 22. But it’s not bloated either, so owning it at a big discount from these lower levels is not going to be a major financial mistake.
Even though I believe that the floor is in for Exxon stock, I have little faith in expecting a rally from here. So today I share an options trade that doesn’t need a rally to profit. In fact, even if XOM falls another 10%, I would still retain my maximum gains.
How to Trade XOM Stock Today
Using options allows me to create a buffer zone between current prices and my level of risk. Compare that with risking $78-per-share and needing a rally to profit.
Technically, $72-per-share has been a floor since early 2016. I bet that it would need a new catalyst to revisit the lows of the 2015 correction, which carried it to $68-per-share. For now, I am comfortable having a breakeven point of $69 in the current macroeconomic conditions.
The experts on Wall Street agree. Even though they are mostly advocating a HOLD on XOM stock, it’s still trading much lower than their average range.
The Trade: Sell the XOM Jan 2019 $70 naked put and collect $1 to open. Here, I have an 85% theoretical chance that I would retain maximum gains. But if the price falls below my strike, then I own the shares and would suffer losses below $69.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the XOM Jan 2019 $70/$67.50 credit put spread, where the risk is limited. If the spread wins, it would deliver 15% in yield.
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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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