Exxon Bear Put Spread May Offset Short-Term Profit Taking Expected After Highs

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  • Shares of energy giant Exxon Mobil have gained 49% since the start of 2022
  • The price of Brent has jumped since the invasion of Ukraine by Russia
  • In the event of short-term profit taking, investors might consider adding XOM stocks to long-term portfolios.

Stocks of oil majors Exxon Mobil (NYSE:) hit a multi-year high on March 8 and is up around 49% so far in 2022. By comparison, the index has returned 47.5% and Chevron (NYSE:), the main peer and competitor, is up 44.7% since the start of the year.

Exxon Mobil weekly chart.

Shares of the tanker and producer have a 52-week range of $52.10 to $91.50 and the company’s market capitalization currently stands at $363.3 billion. Readers might be interested to know that at the start of the pandemic in March 2020, Exxon shares fell to $30.11.

The fortune of oil stocks depends mainly on the price of the raw material. As of this writing, is around $127. Still, it started 2022 below $80. In other words, Exxon shares and its peers benefited from the soaring price of .

The Russian invasion of Ukraine was the main reason for this meteoric increase in the price of oil. According to JPMorgan, in the coming months we could see oil at $185.

Exxon Mobil released its fourth quarter financial statements on February 1. was $84.96 billion, up 83% year-over-year. Earnings per share of $2.05 were above analysts’ expectations.

On the results, CEO Darren Woods commented:

We made great progress in 2021 and our plans for the future position us as leaders in cash flow and earnings growth, operational performance and energy transition. »

Meanwhile, at the company’s Investor Day on March 2, the oil giant cut its U.S. Permian Basin growth expectations for this year from 25% to 20%. Management also announced its intention to exit assets in Russia (ie the Sakhalin-1 LNG venture). This decision will have an impact of approximately 1% to 2% on the company’s profits and its oil production.

Prior to the quarterly earnings release, Exxon stock was around $76. As of this writing, it’s at $87.70.

Finally, the current price supports a dividend yield of 4.0%.

What to expect from Exxon Mobil stocks

Among 30 analysts interviewed via invest.comthe XOM stock has a “neutral” rating.

Consensus estimates from analysts surveyed by Investing.com.
Consensus estimates from analysts surveyed by Investing.com.

Source: Investing.com

Meanwhile, Wall Street has a 12-month median price target of $83.40 for the stock, implying a decline of more than 8% from current levels. The 12-month price range currently sits between $66 and $111.

However, under a number of valuation models, such as those that might consider P/E or P/S multiples or terminal values, the average fair value of Exxon shares over Investing Pro amounts to $103.94.

Valuation models by InvestingPro.
Valuation models by InvestingPro.

Source: InvestingPro

In other words, the fundamental valuation suggests stocks could rise by around 14%.

Currently, XOMs P/E, P/B and P/S ratios are 16.6x, 2.3x and 1.4x. Comparable metrics for peers are 16.2x, 1.6x, and 1.3x. These numbers show that despite the recent price spike, the fundamental valuation of XOM stock is not necessarily frothy yet.

Although we remain bullish on XOM stocks over the long term, short term profit taking is likely. In this case, we could see a potential pullback towards $80.

Add XOM stocks to portfolios

Exxon Mobil bulls who aren’t concerned about short-term volatility might consider investing now. Their target price would be $103.94 as suggested by fundamental valuation models.

On the other hand, others might expect XOM stock to decline in the coming weeks. So, traders expecting some profit taking on Exxon stock might consider setting up a bearish sell spread.

Most options strategies are is not suitable for all retail investors. Therefore, the following discussion of XOM stocks is offered for educational purposes and not as an actual strategy for the average retail investor to follow.

Bear Put Spread on XOM Stocks

Current price: $87.70

In a bearish sell spread, a trader has a long sell with a higher strike price as well as a short sell with a lower strike price. Both legs of the trade have the same underlying stock (i.e. Exxon Mobil here) and the same expiration date.

The trader wants the XOM stock price to drop. However, in a bearish sell spread, the levels of potential profit and potential loss are limited. Such a Bear Put Spread is established for a net cost (or net debit) which represents the maximum loss.

To leaveLook at this example:

For the first step of this strategy, the trader can buy an at-the-money (ATM) or slightly out-of-the-money (OTM) put option, such as the XOM put option from June 17, 2022 at 85 strikes. This option is currently offered at $5.95. It would cost the trader $595 to own this put option which expires in just over three months.

For the second step of this strategy, the trader sells a XOM put, such as the June 17, 2022 XOM put at 80 strikes. This optionThe current premium is $4.05. The options writer would receive $405, excluding trading commissions.

Maximum risk

In our example, the maximum risk will be equal to the cost of the spread plus commissions. Here, the net cost of the spread is $1.90 ($5.95 – $4.05 = $1.90).

As each option contract represents 100 shares of the underlying stock, i.e. XOM, wed need to multiply $1.90 by 100, which gives us $190 as the maximum risk.

The trader could easily lose this amount if the position is held to expiration and both legs expire worthless, i.e. if the stock price at expiration is higher than the stock price. exercise of the long put (or $85 in our example).

Maximum profit potential

In a bearish sell spread, the potential profit is limited to the difference between the two strike prices minus the net cost of the spread plus commissions.

So, in our example, the difference between the strike prices is $5 ($85 – $80 = $5). And like usAs we saw above, the net cost of the spread is $1.90.

The maximum earnings per share is $3.10 ($5 – $1.90 = $3.10) per share less commissions. When we multiply $3.10 by 100 shares, the maximum profit from this options strategy is $310.

The trader will make this maximum profit if the XOM stock price is at or below the short put strike price (lower strike price) at expiration (or $80 in our example).

Readers who have traded options before are likely aware that short sell positions are usually awarded at expiration if the stock price is below the strike price (i.e. $80 here). However, there is also the possibility of early assignment. Therefore, the position would require monitoring until expiration.

XOM price breakeven at expiration

Finally, we should also calculate the breakeven point for this trade. At this price, the trade will neither gain nor lose money.

At expiration, the strike price of the long put (i.e. $85 in our example) minus the net premium paid (i.e. $1.90 here) would give us the price balance XOM.

In our example: $85 − $1.90 = $83.10 (minus commissions).

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