There was a large roll in Exxon Mobil (XOM) calls yesterday that caught my eye. When the stock was trading $83.14 a trader paid $1.40 for 11,700 of the Jan 82.50 / March 87.50 call spread. At first blush this might have appeared to be a bullish roll up and out, but the Jan 82.50 calls were bought to close for $2.15 and the March 87.50 calls were sold to open, suggesting this was an investor rolling an overwrite (a yield enhancement strategy) on a 1.17 million share long position. This roll makes sense as the stock was already above the short call strike in Jan expiration with three months to go, thus capping any further gains above current levels. The new break-even on this position is at $88.25, up 6% from the trading level. I thought it made sense to highlight this roll as we often discuss overwriting strategies on the site but it’s important to reinforce the fact that despite a move of the stock through the strike, you can always buy to close, roll, or leave in place and take your chances on missing out on potential further gains.
XOM reports Q3 earnings Friday morning before the close. The options market is implying about a $1.20 move in either direction or about 1.5%, which is basically inline with the average one day move over the last four quarters. To figure the implied move look at thee weekly at the money straddle, at the moment with the stock at 83.50 it is about $1.20, or 1.5% of the stock price. If you bought that and thus the implied move you would need a rally above $84.70 or a decline below $82.30 to make money by Friday’s close.
But for those with a directional inclination or existing positioning and consider short-term term put protection or to lever up a long, the at the money call or put offered at 60 cents seems cheap as chips.
There are two reasons a long holder might consider adding a put or a call to an existing long. First on the protection side. Shares of XOM have rallied about 11% since its 52-week lows in mid-August, and the recent collapse of oil drillers like Schlumberger (SLB) just making a new 52 week low Friday after its disappointing Q3 earnings might cause investors to consider near-term protection, especially given its laggard status in the Dow.
On the flipside, some laggards in the Dow have come to life of late, like General Motors (GM) which has rallied 30% since the start of September. WIth XOM now banging up against technical resistance, a beat and raise could easily send the stock up a few percent the day of results.
Personally, I don’t have a directional bias but the roll up and out of an apparent overwrite got me looking at the name, and at the money options are certainly cheap in vol and dollar terms for those with a directional bias.