New options trade: Sold put options on XOM
I’ve made a number of options trades in recent weeks – some to reduce risk, others to take advantage of new option selling opportunities resulting from increased volatility. This week I mostly (but not entirely) took a step back while waiting for the market to further tip its hand.
At the same time I’ve been noticing a number of big-name blue chips – and longtime buy candidates – continuing to weaken and getting closer to coming within tempting option selling distance. Late in the week one of them did just that and triggered a new short put option position:
New position:
Exxon Mobil [[XOM]] – Late in the day on 6/25/10 my limit order to sell some January 50-strike put options against XOM in my IRA was triggered as the stock dropped on weakness in the sector:
The world’s largest oil and gas company, Exxon Mobil explores for, produces and refines oil around the world, and is also one of the world’s largest makers of commodity and specialty chemicals. The company also just completed an all-stock acquisition of natural gas producer XTO Energy, a move designed to enhance Exxon’s position in the development of unconventional natural gas (e.g., shale) and a big bet on the future of that energy source.
While Exxon’s earnings traditionally have offered a high degree of stability, risks do exist, including near-term dilution from the XTO merger, increased production costs, lower oil and gas prices, currency risk (the company benefits from a weaker dollar), competition, and potential legislative/regulatory risks. Positives include the company’s strong operating history, its diversification with the XTO merger, and the projected continued long-term uptrend in the use of fossil fuels.
Currently trading at $59 and yielding almost 3%, XOM is clearly in an intermediate-term downtrend and appears likely to test downside support in the mid $50s. It is also at intermediate-term oversold levels (and very near longer-term oversold levels), which could suggest a possible bottom being formed in the coming weeks/months.
Valuation wise, XOM is trading near the low end of its current calculated fair value estimates, which range from the mid $50s to over $150. As always, to be conservative, I use the lower estimate as a reference and then look to buy at a discount to that. (Still, this value is always somewhat of a moving target subject to revisions in earnings projections and growth rates.)
In terms of dividends, despite the company’s preference for stock buybacks it has managed to achieve an excellent dividend growth record (as evidenced by its inclusion in Standard & Poor’s index of Dividend Aristocrats), with 27 years of consecutive dividend increases and a current average 5-year dividend growth rate of over 9%. If ultimately put the stock, my cost basis will be about $47.80 with a corresponding dividend yield of almost 3.7% (based on the current dividend payout).
