Trade Update $XOM – Taking Profits on Call Butterfly

by Enis September 10, 2013 11:55 am • Commentary

Since we initiated the XOM call fly almost 3 weeks ago, oil rallied from near 104 to above 110, but XOM stock was unable to muster much of an advance.  With oil’s 2% selloff today, XOM is moving lower once again.  Since we think the Syria situation has become much more benign after Russia’s offer, the risk to oil is to the downside.  With that in mind, XOM might be in for a test of the long-term support around $85.  We don’t want to let our profits on this trade evaporate, so we’re taking the trade off here.

Action:  Sold the XOM ($87.42) Sept 85/87.50/90 Call Butterfly at $1.13 for a $0.38 gain


Original Trade August 21, 2013:  $XOM –  Oil Spill

Enis has written about XOM’s fairly dramatic short term decline over the last 2 weeks, first in his Chart of the Day on Monday (here), and then yesterday in his Name that Trade post (below).  It is our view that the stock is likely due to settle right above prior support (or at least put in an up day!) soon and the structure detailed yesterday will take advantage of that potential stabilization by isolating a slightly bullish range over the next month, allowing for some room for error up and/or down a few %.

After a little deliberation on strucutres, and watching the stock for the last 2 and half trading days (after the steep decline), we are now ready to pull the trigger on this trade.

Trade : XOM ($86.95) Bought the Sept 85/87.5/90 Call Butterfly for $0.75
  • Buy 1 Sept 85 Call for 2.70
  • Sell 2 Sept 87.5 Calls at 1.16 (2.32 total)
  • Buy 1 Sept 90 Call for 0.37

Break-Even on Sept Expiration:

Profits: btwn 85.75 and 89.25 make up to 1.75, max gain of 1.75 at 87.50

Losses:  btwn 85 and 85.75 lose up to .75 and btwn 89.25 and 90 lose up to .75, max loss of .75 below 85 and above 90




Original Post Aug 20th, 2013:  Name That Trade $XOM – What to Do When It’s So Oversold?

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:

Daily chart of XOM, Courtesy of Bloomberg
Daily chart of XOM, 200 day ma in black, Courtesy of Bloomberg

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.