Options Update: Exxon Mobil Targeted by Heavy Call Volume Ahead of Earnings

Shares of crude-oil behemoth Exxon Mobil
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have jumped more than 1% today, riding the nearly 6% rally in crude futures and the broad buying mood on Wall Street. The company is also making headlines after declaring a fourth-quarter dividend of 40 cents per share. Furthermore, the company is slated to release its quarterly earnings report tomorrow, with the Street looking for a profit of $2.39 per share. As a result, options traders have taken the opportunity to load up on XOM calls.

Specifically, more than 35,000 XOM calls have traded so far, more than doubling the stock’s average daily call volume. What’s more, this spike in volume has placed the equity on today’s Intraday Volume Explosion List. However, it was the particular attention being paid to XOM’s November 80 call that caught my eye today.

Exxon Mobil volume details

Looking at the chart above, you can see that practically all of today’s volume is changing hands at the ask price. This ask volume is typical of buy-to-open activity, and indicates that options traders could be snatching up long positions on the shares as crude prices rebound. For today’s call-buying example, I’ll be using the combined block of 550 contracts that traded at 12:51 p.m. Eastern time – all of which traded at the same time on the same exchange, hinting that they could be part of a larger position.

Anatomy of an Exxon Mobil Call Position

Digging into today’s call-buying example, the trader purchased 550 XOM November 80 calls for $3.12, or a total outlay of $171,600 — ($3.12 * 100)*550 = $171,600. For this trade to reach breakeven, XOM would need to rally about 11% to $83.12 per share. We arrive at this by adding the cost of the option ($3.12) to the strike of the purchased 80 call ($3.12 + $80 = $83.12). The total loss for this position is limited to the initial investment of $171,600.

By entering this trade, the investor is indicating that he expects XOM to rally sharply during before the options expire on November 21. That said, let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.

Getting Technical

The past couple of months have been rough for XOM, as the stock has fallen about 16% from its mid-May peak. However, XOM has rebounded in recent weeks, rallying 21% from its mid-October lows near the 57 level. What’s more, the shares have edged above former resistance at their 10-week moving average. But the stock is far from gushing higher, as XOM still faces staunch resistance at its 20-week moving average and the round-number 80 level. The security has not closed a week above its 20-week trendline since early July. This overhead resistance could cripple a November 80 call position if XOM’s recent momentum fades. In fact, given the security’s reluctance to push past these key resistance levels, a rally into the 80 level could mark a prime entry point for a short position on XOM, from a technical perspective.

Weekly chart of Exxon Mobil since May 2008 with 10-week and 20-week moving averages

The Sentiment Drivers

The sentiment backdrop for XOM is mixed. On one hand, Zacks.com reports that 8 of the 10 analysts following the shares rate them a “buy” or better. If crude prices once again resume their recent downtrend following today’s bounce, we could see downgrades from the brokerage bunch. Such a development would be yet another strike against a potential November 80 call position.

On the other hand, the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.95 ranks in the 76th percentile of its annual range, reflecting a healthy degree of pessimism among speculative options traders. While I would normally view this as a potentially bullish indicator for XOM, the stock’s poor technical performance leads me to believe that this negativity is par for the course, and holds little contrarian value. What’s more, peak call open interest resides overhead at the 80 strike in the November series of options, and could work against any attempts to topple this technical resistance level as expiration draws nearer.

Sentiment indicators for Exxon Mobil

The Verdict?

In my opinion, betting on XOM to extend its rally is a bet that oil prices will continued to rise. Many on Wall Street might believe that crude-oil prices are due for an extended bounce given the recent sell-off in the commodity, but I would suspect that we will only see this type of strength return when fears of a global economic recession fully subside. As such, it could be a while before we see true strength return to crude prices, and, by proxy, XOM shares. Along these lines, selling an XOM December 80 call might work in your favor. Better yet, a December or January 2009 80 or 85 put could be more profitable if economic concerns send oil prices and XOM shares sharply lower.

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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.