The Nasdaq and S&P 500 put in another strong reversal Tuesday, but oil stocks continue to steal the show. Meanwhile, ExxonMobil stock broke out above resistance near 66 on Jan. 4 and effectively staged a breakout from a shallow cuplike pattern with a 66.48 buy point. In bullish form, XOM has continued on its upward trajectory since then.
The company is ranked No. 3 in its group and has a Composite Rating of 97, an EPS Rating of 68 and a Relative Strength Rating of 92. So, Investors thinking strength in oil stocks, including ExxonMobil stock, will continue for the next week or two could look at a short-term bull put spread.
ExxonMobil Stock: Why A Bull Put Spread May Work Now
To execute a bull put spread, an investor would sell an out-of-the-money put in ExxonMobil stock and then buy a further out-of-the-money put.
Selling the Jan. 21-expiring monthly put option with a 70 strike price and buying the 68 put would create a bull put spread.
This spread was trading Tuesday for around $0.41. That means a trader selling this spread would receive $41 in option premium and would have a maximum risk of $159.
That represents a 26% return on risk between now and Jan. 21 if XOM stock remains above 70.
If ExxonMobil stock closes below 68 on the Jan. 21 expiration date the trade loses the full $159.
Breaking Even In This Options Trade
The break-even point for the bull put spread is 69.59, which is calculated as 70 less the 0.41 option premium per contract.
This bull put spread trade has a delta of 18. This means it is a similar exposure to owning 18 shares of XOM, although this exposure will change over time as the stock price moves.
In terms of a stop loss, if the spread increased in price from $0.41 to $0.85, I would consider closing early for a loss. I also wouldn't force a trade like this. It may be better to wait for a minor pullback first in ExxonMobil stock.
With earnings due in early February, this trade in XOM should have no earnings risk.
Please remember that options are risky, and investors can lose 100% of their investment.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ.
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