Exxon Mobil Corporation: Add Fuel to Your Portfolio With XOM Stock

InvestorPlaceInvestorPlace - Stock Market News, Stock Advice & Trading Tips

Oil prices have been depressed for months. There is no denying that OPEC has a lot of control over oil prices . As a result, great energy companies like Exxon Mobil Corporation ( XOM ) have suffered tremendously.

Although there are many levered energy businesses that are broken companies, XOM is only a broken stock. It has a healthy balance sheet and will emerge stronger once this artificial pressure on oil prices abates.

Click to Enlarge Short term, I see extreme technical price tension in crude oil. This is likely to resolve itself with a big move - though in which direction is unknown. Recent prices rose sharply, setting higher lows and knocking on an important pivot point.

I am of the opinion that OPEC is not yet done inflicting damage on western oil producers, so I am willing to bet that the breakout fails and crude price falls. If that happens, the Exxon stock price will suffer.

5 of Warren Buffett's Best Stocks to Buy and Hold

Technically, Exxon's price pattern is also at an important midterm pivot point. Losing it could invite more sellers. So I want to short XOM stock mid-term, but without spending any out-of-pocket money.

The Exxon Mobil Trade

Click to Enlarge I can accomplish this using three separate trades concurrently:

Trade 1: I buy the XOM April $77.50 put. This is a bearish trade for which I pay $1.80 per contract. Trade 2: I also buy the XOM March $79.50 put. For this I pay an additional $1.40 per contract. The combined expense for trades one and two is my max loss. I chose close-to-the-money puts, so I only need to guess direction of the move. If I go cheaper and lower from current price, I would need to not only guess direction but also the magnitude of the move. Owning close-to-the-money puts means that I stand to win if Exxon stock price falls even by a small fraction. I broke up the risk associated with owning the puts by spreading them across two months. Trade 3: In order to increase my chances of profit, I sell the XOM January 2017 $67.50 put. For this, I collect $3.25 per contract. Although this is a credit to my account, it opens a potential liability, thereby requiring margin against it. If Exxon Mobil falls below $67.50 while I am short that put, I could be obligated to buy 100 shares of the stock for each put sold.

Overall, the three trades' net effect is a net credit of five cents per contract. Ideally, for max gains, I want Exxon stock to fall in March and April by about $13 per share, or about 16% from current prices. If I am wrong and XOM rallies from here, I lose nothing since I get paid to deploy the trade. If my assumptions change, I can close, change or add to any portion of this strategy at any point to adjust.

Options are risky, especially when selling puts. I only sell puts if I am willing to own the stock at the put strike sold.

In this case I think that there are worse things than owning Exxon Mobil stock at a 16% discount from current levels.

Nicolas Chahine is the managing director of . As of this writing, he did not hold a position in any of the aforementioned securities.

More From InvestorPlace

7 Mining and Materials Stocks That Could Gain 15%-150% American Airlines Group Inc: Cheap and Ready for Takeoff ( AAL 10 Best Stocks to Buy for a Quick Pop

The post Exxon Mobil Corporation: Add Fuel to Your Portfolio With XOM Stock appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Markets Videos


    InvestorPlace is one of America’s largest, longest-standing independent financial research firms. Started over 40 years ago by a business visionary named Tom Phillips, we publish detailed research and recommendations for self-directed investors, financial advisors and money managers.

    Learn More