Name That Trade – $XOM Needs a Tiger in Its Tank

by Dan February 19, 2015 2:18 pm • Commentary

Exxon (XOM) has had a tough week, down about 4% vs the XLE (of which it is 16% of the etf’s weight) which is down only 1.5%. The under-performance is related to Warren Buffett’s disclosure that his investment firm Berkshire Hathaway has entirely exited its stake in the integrated oil company, and just yesterday a fire at one of its refineries in California.

I think it is important to note that XOM is down less than 15% from the all time highs made in Q3 2014, and while the stock has been volatile in the last few months (trading between $97 and $87) the stock seems to be a very solid and possibly conservative way to play for an oil bounce for those who think crude is doing its best to put in a bottom. I am not exactly in the that camp, but on a relative basis to the volatility in the commodity and other oil related stocks, XOM’s 3% dividend yield is likely safe at the expense of share buybacks, and as one of the top five market cap companies in the world, I suspect it would take a global commodity and equity route for the stock to break long term technical support at $80 (red line below):

XOM 7r chart from Bloomberg
XOM 7r chart from Bloomberg

Back in 2008, when Crude was at previous all time highs north of $140, XOM earned $8.47 a share, and saw that more than cut in half in 2009 to $4 a share with crude’s 80% peak to trough decline (from close to $150 in July 2008 to the low $30s in January 2009).  Last year XOM earned $7.60, and analysts have already cut their estimates in half for 2015 to $3.86.

So here is the thing. With crude’s rebound in 2009/2010 that saw the commodity double from the lows, XOM’s profits grew by 35% to $6.22 in 2010, and made a new high of $8.42 in 2011. So the question prospective XOM bottom pickers have to ask themselves is whether or not crude has stabilized and possibly put in a low, and will the company manage costs effectively to keep the stock outperforming the decline in the commodity?  Sorry peeps, I don’t have those answers, and to be frank my worst trade in years was trying to pick a bottom in USO this past August, but the company could have some answers at their March 4th analyst meeting.

Between now and March 6th weekly expiration, the options market is pricing about 3.3% move in the stock.   With stock at $90, the March 6th 90  straddle (the put and the call) is offered at about $3, so if you bought that you would need a move above $93, or below $87 by the close on Friday March 6th to just break-even.

One bearish trade I like here is the March 90/85/80 put fly for .95. That takes you down to the recent lows without spending a ton on premium.

As far as bullish stock alternatives the skew in October makes for some interesting structures. We like the Oct 80/95 risk reversal for about even money (10c credit with stock at 89.80). That’s selling 23 vol in the puts and buying 17 vol in the calls. That skew is the reason why the calls are are only 5 dollars out of the money while the puts are nearly 10. That’s a much better trade than buying stock here for those not concerned with collecting the 3% dividend yield.