In the ever-evolving landscape of energy markets, a seismic shift is currently unfolding. Crude oil, often hailed as the lifeblood of the global economy, is making significant strides toward the coveted $90 threshold. This remarkable ascent, propelled by a myriad of influencing factors, has seized the attention of traders and investors across the globe.
With oil prices escalating from the mid-$60s to the upper $80s, the stakes are undeniably high, and the opportunities are aplenty. Today, we’re unveiling an options strategy designed to harness substantial income potential from the upward trajectory of crude oil toward the $90 mark.
XOM Covered Call Strategy Unveiled
Exxon Mobil (NYSE:XOM), a colossal entity in the realm of integrated oil and gas companies, stands out prominently. Its diversified operations encompassing exploration, production, refining, and marketing offer investors a unique chance to reap the rewards of surging oil prices while simultaneously mitigating risk through its extensive portfolio diversification. Moreover, Exxon Mobil’s track record of financial stability and consistent dividend payouts adds an attractive income component to potential capital gains, rendering it an enticing choice for investors seeking exposure to the oil market.
Let’s delve into the specifics of a covered call strategy tailored to leverage the potential surge in crude oil prices towards $90.
Example 1: XOM Covered Call at $125 Strike
To initiate this strategy, one would acquire 100 shares of XOM stock at a cost of $11,451. Subsequently, selling the November 17th $125-strike call option, which was trading at approximately $1.16, generates a premium of $116 per contract for covered call sellers. This sale translates to an income yield of 1.02% over 43 days or an annualized rate of approximately 8.49%. This calculation assumes that the stock remains at its current level. However, what happens if XOM surpasses the $125 strike price?
Should XOM close above $125 on the expiration date, the shares would be called away at $125, resulting in a total profit of $1,165 (comprising the gain on the shares and the $116 option premium received). This equates to a robust 10.3% return, equivalent to an impressive 52.8% on an annualized basis.
Example 2: XOM Covered Call at $115 Strike
In this alternate scenario, we consider a lower strike price, opting for the November 17th $115-strike call option, which can be sold for $4.80. This transaction generates an income yield of 4.38% over 43 days or an annualized rate of approximately 36.29%. If XOM closes above $115 on the expiration date, the shares will be called away at $125, resulting in a total profit of $529 (comprising the gain on the shares and the $480 option premium received). This translates to a 4.8% return or 24.8% on an annualized basis.
However, it’s essential to acknowledge the inherent risk in this trade, particularly the possibility of XOM’s stock price declining, potentially erasing any gains derived from selling the call options.
Technical Insights and Additional Considerations
The Barchart Technical Opinion rating currently stands at 40% Buy, with a short-term outlook indicating a strengthening trend. It’s worth noting that the market is approaching overbought territory, warranting vigilance for potential trend reversals.
The implied volatility for XOM is presently at 21.16%, situated between its 12-month low of 19.59% and its 12-month high of 45.99%. The implied volatility rank is 5.96%, with an IV percentile of 2%.
XOM’s current annual yield hovers around 3.21%.
Company Profile and Strategic Outlook
ExxonMobil’s prominence in the energy sector is underscored by its optimal integrated capital structure, historically delivering industry-leading returns, and a management track record emphasizing disciplined capital expenditure throughout commodity price cycles. The company boasts some of the most prolific upstream assets globally and commands a significant presence in global refining and chemicals operations. Its unmatched dividend history and credit profile set it apart in the industry.
ExxonMobil’s commitment to allocating a substantial portion of its budget to key oil and gas projects underscores its dedication to growth and profitability. It is important to note that ExxonMobil’s business perspective differs from many peers, as it has not pledged substantial emissions reductions to combat climate change.
ExxonMobil organizes its operations into three primary segments: Upstream, Downstream, and Chemical.
It’s vital to remember that options trading carries inherent risks, and investors can potentially lose their entire investment. This article is intended solely for educational purposes and should not be construed as a trade recommendation. Always conduct thorough due diligence and seek guidance from a financial advisor before making any investment decisions.
Featured Image: Freepik @ chandlervid85
