Back in late in Aug Enis and I bought a tight call butterfly (below) in XOM as the stock approached long term support above $86. The stock bounced a bit and we took profits in Sept, but now with the stock once again approaching key support, it’s decision time again for this oil stalwart.
XOM is flat in 2013, a major laggard in a big market advance. The stock’s last earnings report indicated the difficulties facing the mega energy companies – more expensive exploration, political risks, and rising costs. But the company’s now a 11 P/E stock with a 3% dividend with 5% expected earnings growth over the next 2 years. It’s not a name we expect to move much overall, but we like the odds here to take another shot for a bounce back towards $90 over the next few weeks.
The one year chart below shows the massive support level at $86 (green line) and $90 (red line) that has served as a recent resistance, while also very close to the 200 day moving average (yellow line). It is our sense that the stock could remain range-bound between $85 and $90 in the short term, but like to play for a bounce off the support level as we did back in August.[caption id="attachment_30861" align="aligncenter" width="589"] XOM 1yr chart from Bloomberg[/caption]
If the stock does breach 85 convincingly to the downside, we’ll probably exit this trade. The benefit of this structure is that it doesn’t lose much on the first 2-3 dollars of downside in the near term.
TRADE: XOM ($86.25) Bought the Nov 85/90/95 Call Fly for $1.64
-Bought 1 Nov 85 Call for 2.48
-Sold 2 Nov 90 Calls at .46 or .92 total
-Bought 1 Nov 95 Call for .08
Break-Even On Nov Expiration:
-Profits of up to 3.36 btwn 86.64 and 93.36. Max profit of 3.36 at 90
-Losses of up to 1.64 btwn 85 and 86.64 and btwn 93.36 and 95, with max losses of 1.64 above 95 and below 85.
Update Sept. 10th, 2013: Trade Update $XOM – Taking Profits on Call Butterfly
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:
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.