Options Update: Puts Pile on Exxon Mobil (XOM) as Crude Plunges Past $100
While most of the market is focused on the financial sector, oil-related securities are in the midst of a crisis of their own. November crude futures have plunged nearly 8% today, breaching the psychologically important $100-per-barrel mark on concerns of a slowing global economy.
In fact, crude-oil prices have fallen more than 33% since peaking at $147.90 per barrel on July 11. Against this dour backdrop, Exxon Mobil
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PowerRating) the world’s largest integrated oil company, has attracted the attention of bearish options traders today.
Specifically, put volume has soared to more than 15,600 contracts, more than tripling XOM’s average daily put volume and placing the stock on today’s Intraday Volume Explosion List. Digging a bit deeper into the put activity, I noticed that about 67% of these contracts traded at XOM’s deep out-of-the-money 75 put, catching my eye this afternoon.
The Anatomy of an Exxon Mobil Put-Sell Position
As you can see from the chart above, nearly all of the volume is trading at the bid price, suggesting that traders are selling these contracts. There is a chance that these contracts could have been sold to close an existing purchased put position, considering that volume at XOM’s October 75 put falls short of open interest at the strike. However, for the sake of argument, let’s assume that we are dealing with a put-sell position. At 10:04 a.m. Eastern time, a series of trades totaling 906 contracts traded at the bid price of $1.34, so we’ll use this trade as today’s example. Running with this put-selling theme, let’s examine how the trade actually plays out. The hypothetical trader sold 906 XOM October 75 puts for $1.34, or a total credit of $121,404 — ($1.34 * 100)*906 = $212,404.
Remember, in a put-sell position, all a trader needs is for the underlying stock to remain above the sold strike through expiration. So, as long as XOM stays above 75 through October 17, the trader keeps the premium received. That said, let’s see if the stock’s technical picture or sentiment backdrop provide any clues on the potential for XOM to hold its ground for the next 2 weeks.
Getting Technical
XOM’s technical picture does little to instill confidence in an October 75 put sell position. Since January, the stock has fallen more than 13%, with the stock’s 10-week and 20-week moving averages pacing the decline. The prior 2 weeks have been kind to XOM, as the shares have logged 2 consecutive weekly closes above these intermediate-term trendlines. However, today’s nearly 2% drop in the stock is threatening this recent strength. Furthermore, XOM is once again trading below round-number resistance at the 80 level.
All is not lost for XOM, though, as the shares are clinging to long-term support in the 77 region. Should the shares continue to find ballast in this region, it could bolster the case for a sold October 75 put. Technical traders should keep a close eye on the 10-week moving average and the 77 level, as a breach of the former could quickly increase pressure on the latter.
The Sentiment Drivers
The sentiment backdrop for XOM is particularly concerning for contrarians. Despite heavy losses in the price of crude oil and the stock’s 13% year-to-date decline, investors continue to bet on a rally in XOM shares. Specifically, the security’s Schaeffer’s put/call open interest ratio (SOIR) of 0.49 indicates that calls more than double puts among near-term options. Furthermore, this ratio falls just 3 percentage points shy of an annual peak, meaning that traders have been more bullishly aligned on XOM only 3% of the time in the past 52 weeks.
Underscoring the optimism in the options pits, is the stock’s open interest configuration. Peak call open interest for October resides at the deep out-of-the-money 95 strike, totaling nearly 52,000 contracts. Meanwhile, peak put open interest for October rests at the deep out-of-the-money 75 strike, numbering about 24,000 contracts. This skew toward overhead call open interest indicates that investors are looking for a rebound in XOM, despite the stock’s poor price action and falling crude prices.
Elsewhere, Wall Street analysts are also heavily bullish on XOM. According to Zacks.com, 7 of the 10 brokerage firms following the shares rate them a “buy” or better, with no “sell” ratings to be found. Any downgrades from analysts on the prospects for falling global oil demand could provide additional selling pressure for XOM shares, thus placing a sold October 75 put in jeopardy.
The Verdict?
I am all for a put position on XOM at the moment, but I believe that buying a strike closer to the shares, rather than selling one deep out-of-the-money, would be considerably more profitable. With the potential for crude-oil demand to sink further, and XOM locked in a downtrend, it could be just a matter of time before we see traders begin to abandon the security. Such an occurrence could send XOM on another sharp downleg, potentially forcing the stock to retest its September 16 lows. If you are looking for a put play on XOM, I would suggest considering a November or January 2009 80, or 85 put to take advantage of an unwinding of this heavy handed bullish sentiment.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.