A bullish bet on Exxon Mobil using options after decline in crude oil prices

Posted By: EN Todayon: November 10, 2023In: General Energy News, Oil & Gas News

West Texas Intermediate futures have dropped precipitously since September, when prices screamed above $93 per barrel. The Energy Select Sector SPDR ETF (XLE) has pulled back nearly 10%, as the 25-names making up the fund are sensitive — and often correlated — to moves in crude. Oil prices fell more than 4% on Tuesday to their lowest since late July, as mixed Chinese economic data and rising OPEC exports eased fears about tight markets. To boot, the dollar strengthened, giving bears more ammunition to pounce on crude oil bulls. My friend Brian Sullivan has been on his “A game” per usual and speaking to the “not booming” global demand. @CL.1 YTD mountain WTI in 2023 Despite all of that sounding quite bleak for energy and oil, I believe there is opportunity in Exxon Mobil . Exxon is the world’s largest refiner with a total global oil refining capacity of nearly 5 million barrels per day. Moreover, I think this 2023 laggard has priced in the fact that China importing of oil has been flat year to date (thank you Sully for the insight.) With relative strength index readings in the low 30s — and with Exxon spending nearly the last two months under both its 50 and 200-day moving averages — opportunity knocks to own this integrated oil and gas company giant. In addition, we have seen volatility pick up specifically on the Cboe Crude Oil Volatility index (OVX) . I want to own this stock at this level but, by using a risk reversal, I will utilize the premium I can collect from selling a put option to buy an upside call with the expectation that XOM can revisit its recent price of $120. The option strategy that I will utilize is a credit spread, better known as a risk reversal. This spread can be established by selling an out-of-the-money put and using the premium collected in writing that put option to buy an upside OTM call. The same expiration will be used for both the put and the call options. Here’s a look at the risk reversal specific to Exxon Mobil: Looking to sell the regular expiration December $100 put for $1.70 (which is 3% lower from 11/09/23 close) Looking to buy the regular expiration December $110 call for $0.80 The result in the sale of the put and the purchase of the call results in a credit spread collecting $0.90 (or $90 per one lot) Typically, a risk reversal is a hedging strategy that protects a long or short position by using put and call options simultaneously. This strategy can protect against unfavorable price movements in the underlying position but also limits the profits that can be made on that position. If an investor is long a stock, they could create a short risk reversal to hedge their position by buying a put option and selling a call option. This risk reversal is being used as an aggressive bull trade. Since I am buying a higher strike price call option and financing the premium paid by selling an out-of-the-money put option, I am essentially putting on a bull trade for close to no cost or even a credit. If I am correct, and XOM continues to recover higher, the short put will become worthless, and the long call will increase in value-generating a considerable profit. However, if I am incorrect about Exxon’s movement, I will be forced to buy the stock at the short put strike price minus the premium collected. In this case, I would own Exxon Mobil at $99.10 as I collected $0.90 on the credit spread/risk reversal. This strategy is considered risky and can generate significant losses, all short puts should be cash covered. Being forced to buy Exxon Mobil lower than where I initially opened the risk reversal is still a better outcome than if I would have simply purchased the stock outright. DISCLOSURES: THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.