Name That Trade $XOM – What to Do When It’s So Oversold?

by Enis August 20, 2013 2:16 pm • Commentary

After yesterday’s post on XOM’s amazing run of down days, I received some questions about what I was thinking from a trading perspective.

First off, I haven’t traded anything in XOM.  While it’s an interesting streak, the overall setup doesn’t interest me enough in either direction.  In fact, the large majority of setups and situations that we look at will result in no trade.  The plan is to filter out only the best ideas, and go from there.  Easier said than done, of course.

However, there is a trade structure that piqued my interest in the options market that I might execute in the coming days, depending on how the stock acts from here.  It’s much different than purely getting long or short the stock, and it fits what I view as the most likely scenario for XOM price action in the coming weeks.  

If we look at the daily chart, we can see the importance of the $85 level for support:

[caption id="attachment_29458" align="alignnone" width="600"]Daily chart of XOM, Courtesy of Bloomberg Daily chart of XOM, 200 day ma in black, Courtesy of Bloomberg[/caption]

The stock has a large amount of upside supply at this point.  The 200 day moving average is just below 90.  Given that the stock is so oversold, I would expect the first real rally to be sold aggressively in XOM.  But any further selling from here puts the stock near the 85-86 bounce area, and likely attracts new buyers.

In short, I like the prospects for a range trade in XOM that targets the 85 to 90 area.  So this is a delta neutral trade (no directional bias), that is centered around the $87.50 level, with the expectation that the stock ends up in a tug of war between bulls and bears in this vicinity:

Buy the Sept 85/87.5/90 Call Butterfly for $0.74

  • Buy 1 Sept 85 Call for 3.12
  • Sell 2 Sept 87.5 Calls at 1.44
  • Buy 1 Sept 90 Call for 0.50

This trade is profitable if XOM closes Sept expiry between 85.74 and 89.26.  It has no delta, and will take a few weeks to make money as the trade needs to bleed the theta decay over time, but if XOM remains in this range for the next month, then this trade would be a nice winner.  Given the technical setup, I like this trade’s prospects.