Unusual Activity in Exxon Put Options: A Closer Look

Exxon Mobil Stock

On October 4th, during morning trading, there was a significant unusual activity in Exxon (NYSE:XOM) put options, particularly in deep out-of-the-money puts. Some investors seem to be employing this strategy to generate additional income.

For instance, an Unusual Stock Options Activity Report highlighted that more than 20,000 put contracts were traded at a $100 strike price, expiring on December 15, 2023. This expiration date is just 72 days away, and the strike price is notably more than $12 below today’s spot price of $112.39.

The premium for these puts stood at $1.57 at the midpoint. Therefore, traders who initiated this trade by selling these out-of-the-money put options collected $1.57 per contract, based on a $100.00 investment. This results in an immediate yield of 1.57% over the next 2 ½ months.

Furthermore, their breakeven price sits at $98.43 (i.e., $100 – $1.57), which is 12.42% below the current price. This suggests that these traders believe there is ample room for XOM stock to decline before they would be obligated to purchase XOM shares.

On the flip side of this trade, it indicates that a significant number of investors anticipate the possibility of XOM falling below $98.43 on or before December 15, 2023. It’s worth noting that the company will have reported its Q3 earnings by then, and global economic conditions during the fourth quarter could significantly impact oil prices and, subsequently, XOM’s stock price.

In essence, purchasing these put options is a considerable bet on XOM’s stock potentially declining by nearly 12.5%.

Exxon’s Strong Cash Flow Poses a Challenge

The challenge for investors holding these put options is that Exxon continues to generate substantial cash flow, which tends to support the stock’s resilience.

For instance, I previously discussed this in my September 22 Barchart article, “Exxon Is Gushing Huge Amounts of Free Cash Flow – XOM Stock Could Rise Further.”

During Q2, Exxon generated $5 billion in free cash flow (FCF), even after increasing its capital expenditure. Furthermore, in the first half of 2023, Exxon generated $16.4 billion in FCF, and FCF for Q3 2023 could range from $11 billion to $13 billion.

This implies that Exxon could accumulate $30 billion in FCF for Q1-Q3 and potentially up to $50 billion for the entire year 2023. While this is lower than the $60 billion generated in 2022, it still suggests a significantly higher stock price.

For instance, if we assume that Exxon generates $44 billion in FCF in 2023, we can estimate that its market capitalization will reach $587 billion. This calculation is based on a 7.5% FCF metric, equivalent to multiplying FCF by 13.3x. Therefore, $44 billion x 13.3x equals an expected market cap of $586.67 billion.

This represents a 30.8% increase from its current market cap of $448.44 billion, as per Yahoo! Finance. Even using a 9% FCF yield (equivalent to 11.1x FCF), Exxon’s market cap would be $488.9 billion, or 9% higher than today’s price.

In summary, this suggests that XOM stock is potentially worth between 9% and 30.8% more, with an average target price of approximately 20% higher, around $134.75.

This analysis underscores why investors who shorted these $100 puts may have the upper hand in this unusual stock options activity.

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