Big Printin’ – XOM Dec Calls

by riskreversal November 9, 2016 3:28 pm • Big Printin'

After some early weakness this morning, Crude Oil held at near term support, and is now threatening to break above the uptrend from the February lows:

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

The technical set up here feels precarious at best, especially when you consider the backdrop of a firmer U.S. dollar on the heels of surging bond yields into what could be a sustained upward move into the Dec 14th meeting where the FOMC is widely expected to raise for only the second time since June 2006.

Despite potential headwinds to the underlying commodity, and the recent decline, energy stocks, measured by the XLE, the S&P Energy Select etf which is 40% Exxon (XOM), Chevron (CVX) and Schlumberger (SLB) has shown decent relative strength, and once again appears poised to breakout to a new 52 week high, as the etf has made a series of higher lows since April:

[caption id="attachment_67994" align="aligncenter" width="600"]XLE 1yr chart from Bloomberg XLE 1yr chart from Bloomberg[/caption]

The largest holding in the XLE, XOM (at 17.25% of the index) saw some fairly heavy short dated call volume that was 2.5x that of average daily volume.  The largest trade of the day was an opening buy of 10,00o of the Dec 90 calls for 49 cents when the stock was $85.80, with 39,000 trading in total on the day.  These calls break-even up 5.5% from the trading level at $90.49, and is just above what could be near term technical resistance at which was the July break-down level:

[caption id="attachment_67998" align="aligncenter" width="600"]XOM 1yr chart from Bloomberg XOM 1yr chart from Bloomberg[/caption]

While the rising rate environment may be making other high yielding stocks less attractive as we see the weakness today in Utilities and Consumer Staples, XOM’s 3.5% dividend yield may be the cherry on top, if energy stocks were to make a run for the prior highs.