New Trade $XOM – Peak Oil Chart

by Dan November 22, 2013 1:29 pm • Commentary

We have watched with interest as XOM has rallied right up to near all-time highs in the past month.  The headlines have heated up, as Buffett/Berkshire have taken a large stake, at the same time that Jim Chanos has singled out the oil majors like XOM as good shorting opportunities, at the start of a long-term secular decline.

Now, to massively understate matters, Buffett/Berkshire is no investing slouch.  They surely have good reasons for investing in XOM.  But their most recent big investment, IBM, has not exactly worked.  One big problem for Berkshire is that it is mostly limited to mega-caps for its largest investments, which might lead to less than ideal investment choices relative to the past.

Here was our view on XOM in our Morning Word post last week:

Of course, we don’t have much interest going head to head with Mr. Buffett on a fundamental argument.  However, we do think that Berkshire likely bought closer to those $85 lows, and buyers up here near $95 are getting a much worse entry in comparison.

$95.49 is the high for the stock in 2013.  $96.12 is the all-time high, set in May 2008.  So a big group of eyeballs will be on the 95.50-96.50 area.  Technically, I’d be surprised to see the stock slice right through there.  But if the stock does cleanly breach that area, it could be off to the races just based on the price action of mega-caps this year who have made new all-time highs.

Nevertheless, with new all-time highs so close, and implied volatility low, buying options looks interesting whether you want to play for a breakout or a fade back into the long-term range.  For now, we’re doing nothing, but with a keen eye out for opportunities.

In the past week, XOM has indeed been unable to get above the $96.12 all-time high set in 2008 (the high this week was $96).  The stock has since backed away from that level, but it is still only 1.5% from its all-time high:

XOM weekly, Courtesy of Bloomberg
XOM weekly, Courtesy of Bloomberg

Even though XOM is right at a crucial technical level, XOM’s implied volatility is near 1 year lows:

XOM 30 day implied volatility, Courtesy of LiveVolPro
XOM 30 day implied volatility, Courtesy of LiveVolPro

The cheap nature of options premium, with the stock at a crucial juncture, sets up an attractive opportunity to use options for a directional thesis:

TRADE:  XOM ($94.80) Bought Jan14 95/90 Put Spread for $1.35

-Buy 1 Jan14 95 Put for 1.90

-Sell 1 Jan14 90 Puts at .55

Break-Even on Jan Expiration:

Profits: btwn 93.65 and 90 make up to 3.65, below 90 make full 3.65

Losses: btwn 93.65 and 95 lose up to 1.35, above 95 lose full 1.35

Trade Rationale:  XOM has traded in the 85 to 95 range for practically all of the past year.  This trade structure offers a low risk way to play for a move back to the middle of that range within the next couple months.  The long-term technical resistance has proved important this week.  We don’t see a strong fundamental catalyst in the coming weeks to give XOM the convincing push to a new all-time high, though if the stock does break out, we’d likely sell the structure for a 0.30-0.50 loss.