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Tag Team: XOM

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Scaled Sentiment Stochastic (S3) Reading: +4

S3 Explained


Jill: Exxon Mobile (XOM), Chevron (CVX), and Southwestern Energy (SWN) have jumped over the last 10 days because of the sudden need for heating oil and the insanely cold temperatures sweeping the nation. There is another arctic blast expected to hit the east coast again this week, so I would expect that trend to continue to benefit the energy companies.

Its 2013 earnings multiple of 11X represents a premium to many major oil companies, but it is a market leader for the industry, and while XOM did report declines in revenue and earnings in its most recent quarterly report these decreases tended to be steeper at its peers. It is poised to take advantage of the oil and natural gas revolution taking place in North America. I expect major capital projects and upstream ventures to drive 2013 production volume.

XOM could report earnings on February 1 as the largest market cap company in the United States, if Apple (AAPL) doesn't pass it back. Exxon took over the number one spot this past week as Apple has plunged after earnings. Consensus sees EPS to have grown by about 2.5% and then accelerate to 8% in each of the next two years. XOM generates tons of cash and has little debt. It pays a dividend of $2.28 (yielding about 2.5%) and has increased it every year for more than 25 consecutive years. Let's turn to Skip and see how we can capitalize on that dividend using options.

Skip: XOM should trade ex-dividend in early February at $0.57 per share. This trade is set up to capture that dividend in addition to speculating on XOM making a further move up in price, possibly to the mid to high $90s. It is essentially hedged for relative to its married put protection.

This set up is what is known as a synthetic call. The synthetic call is one that is long stock (or an index or ETF) as well as long puts in contract size equal to that of the underlying stock.

Should more puts than stock be bought, that position is what I term a dynamic synthetic call. That is such because with more puts held long that stock hedged, should the stock decline in price the additional long puts give the overall position downside gamma, thus, making such a combination what I call dynamic.

The reason that the expiry of the long puts is to March expiration is based on the shorter-term potential for XOM, as well as the Dow 30, to break out into all-time high price levels during this current bull cycle. Should XOM instead meet resistance between now and March expiry while attempting this break out, the 100% controlled risk of this trade's very low dollar risk will have proven to be a prudent choice. Should XOM break out however, the capital risked relative to the reward potential could show an excellent percentage return. And capturing the dividend would have aided in that attempt.

This trade is medium in risk because of the time factor involved, which is rather short term. This trade is medium to high in reward relative to whether or not XOM does break out to all-time highs before the March expiry of the married puts.

Trades: Buy 300 XOM for $91.20 and buy to open 3 XOM March 92.5 puts for $2.60.

The total risk for this synthetic call is $0.73.

The $0.73 risk is calculated as follows:

$91.20 (cost per 100 shares of XOM) + $2.60 (cost for the put) - $0.57 (the dividend) - $92.50 (the strike price of the long put).

Thus, $91.20 + $2.60 = $93.80, while $0.57 + $92.50 = $93.07.

$93.80 - $93.07 = $0.73.

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