Exxon Mobil Corp (NYSE:XOM) offers new investors a compelling 3.95% dividend yield at its current stock price, making it an enticing prospect for value-oriented buyers. In addition to the attractive dividend yield, heightened put premiums present an opportunity for existing investors to engage in an income-generating strategy by shorting out-of-the-money (OTM) put options with near-term expiries.
With an annual dividend payout of $3.80, the stock’s current price of $96.07 translates to a near 4.0% dividend yield (3.95%). This yield would reach the 4.0% mark if the stock were to fall to $95.00, a level that remains viable considering the robust free cash flow (FCF) supporting Exxon’s ability to sustain dividend payments.
Capitalizing on Shorting OTM Puts in XOM Stock
One strategy for generating additional income involves shorting OTM puts, as demonstrated by recommending the shorting of the $95.00 strike price put option expiring on Jan. 19. The play offered a 0.463% put yield, as the stock remained out of the money, relieving the investor of any obligation to purchase additional shares.
This approach can be replicated, given the persistently high put premiums. For instance, examining the $90.00 strike price put for the Feb. 9 expiration period, which is three weeks away, reveals an opportunity for short sellers to earn 48 cents per put contract. The resulting 0.533% yield over three weeks could lead to an annualized expected return (ER) of 9.06% if the strategy is repeated every three weeks throughout the year.
Balancing Upside Potential and Downside Risks
While this income-generating strategy can be lucrative, investors must be mindful of potential downsides. If the stock falls below the put strike price, such as $90.00, the investor may need to purchase XOM shares at that level, potentially incurring unrealized capital losses. However, at $90.00, XOM stock boasts a 4.22% dividend yield, attracting value buyers and potentially supporting a recovery in the stock price.
Furthermore, investors who buy XOM shares at a lower price can sell covered calls on their holdings, helping offset any unrealized losses. In essence, this comprehensive approach underscores the attractiveness of XOM stock at current prices, providing income opportunities for put option sellers with viable alternatives in case of adverse movements in the stock price.
Featured Image: Megapixl
Author Faith Yakubu 
