Trade Update – $XOM: Tiger Blood

by Dan November 12, 2015 2:07 pm • Commentary

A little more than a month ago on Oct 9th (here) we made a defined risk bearish bet that shares of Exxon (XOM) would fail at the sharp downtrend near $80, that had been in place from the all time highs mid last year, here was our rationale, and trade:

To be clear, XOM is a cheap stock, with poor sentiment and a 3.67% dividend yield with little buyback support.  Also, consensus estimates call for an expected 50% eps decline this year from last, not far off from the 53% decline in eps from 2008 to 2009 before bouncing 55% in 2010.   Consensus is only pricing a 9% eps increase in 2016.  So sentiment still sucks despite the bounce. But it may have shifted too quickly given the lack of news and the potential for downbeat guidance and increasingly poor data as it relates to global growth.

Trade: XOM ($79.50) Buy Nov 77.50 / 70 Put Spread for 1.45

Obviously we were way too early on the trade. Our disclaimers about short biased trades at resistance were warranted as the stock popped sharply above the downtrend:

XOM 2yr chart from Bloomberg
XOM 2yr chart from Bloomberg

With the stock’s recent failure, and re-tracement back to the downtrend, the stock is now in a fairly precarious technical spot at a time where it looks like Crude oil has broken its two and half month consolidation in them mid $40s, and possibly threatening a a break below the psychologically important $40 level:

Crude Oil 1yr chart from Bloomberg
Crude Oil 1yr chart from Bloomberg

The sell off in XOM has given some new life to our bearish trade, but to be frank it is now time to play some defense and focus on getting back some premium with 6 trading days to expiration, that as of a few days seemed all but lost.  Now with the stock at $80, the Nov 77.50 puts that we are long are 50 cent bid.  At this point we want to see if we get some follow throw tomorrow on the downside and at that point we might look to close the position.  Stay tuned.

Unusual Activity:   Shortly before noon when XOM was $80.35 a trader bought 70,000 of the April 70/60 put spread for 1.05 or $7.35 million in premium.  This trade breaks-even at $68.95, down 14%, with a max gain of $8.95, or $62.65 million if the stock is $60 or below on April expiration.

What’s interesting about the trade is the strikes.  $70 is kind of a double bottom low from 2011 and this past summer, and $60 appears to be a double bottom low from 2006 and 2010:

XOM 10 yr chart from Bloomberg
XOM 10 yr chart from Bloomberg

On the near term, I’d be more inclined to play for a move back to $70, which is what I tried to do a month ago, and depending upon how much premium I can re-coop from my losing trade I may look to roll this view in the next week.