XOM saw a fairly large call purchase today, at least in contract terms, when the stock was $85.62 a trader paid .32 for 42,000 May 90 calls to open ($1.35 million in premium).
Friday afternoon Dan detailed a way to play for an a bounce back towards $90 before June expiration. Here was that trade idea:
XOM ($85.50) Buy June 85 calls for about $2.50
Break-even on June expiration:
Profits: above 87.50, up 2.4%
Losses: of up to 2.50 between 87.50 and 85, max loss of 2.50 below 85
My View: Its my sense that oil stabilization could be a head fake and few stocks will be immune to selling pressure if crude makes a new low in the months to come. But if I were looking to play for a catch up trade in a high quality stock like XOM, I would consider defined risk plays like the one described above and look to spread by selling a higher strike call if the stock were to make a quick move higher. I am not putting this trade on, but think the risk reward over the next couple months is attractive.
Obviously, these are two different ways to play for a bounce in the stock. The large trade today is looking for a very cheap way to play for a sharp move higher in the near future. The fact that the trader chose May expiration leads me to believe that the company’s April 30th Q1 earnings report is viewed as the event to catalyze a move higher.
The May 90 calls are are only about 15 deltas. They break-even at 90.32, up about 5.5%. The June 85 calls we highlighted are just over 50 deltas and slightly in the money. They have more risk on the day to day basis in the stock but have a much higher probability of being in the money on June expiration than the May 90 calls do on May expiration. Additionally (for good or bad) they have an extra month to play out.
As Dan stated in the Name That Trade post, the goal would be for XOM to catch a bid into earnings and be able to spread them by selling a higher strike call in June or even turning them into a calendar spread with a sale of calls in May.
So if you look at it that way, even though our preferred strike is more bullish to start (in delta terms) it’s probably less ambitious overall. Our idea is that XOM could have found footing recently and 90 seems like a spot it could climb to if that proves to be true.
The trader today has other ideas. They see the potential for an out-sized move, near term. And they were willing to make a lower probability, but in a very good size on that possibility.