New Trade Alert for (XOM)
Buy Exxon July $75 Call @$9.25 or less
Risk Rating: 2.5 (1 = lowest 5 = highest)
Above Break Even Probability: 54%
Max Loss Probability: 8%
Macro MO-mentum has buoyed all asset classes Gold, Stocks and Oil. The stock rally run has been epic with little changed except optimistic attitude.
Sometimes it is more important what DOESN’T happen.
Oil has held ground against a backdrop of extremely negative fundamentals and prospects of the always trustworthy and reliable OPEC complying with production cutback promises .
The increase in U.S. Oil inventory to the highest level since they started keeping records and the weekly rig count increases have not knocked Crude down below the psychological $50 a barrel mark.
Sideways trade from $50 to $55 for over two months targets $60 on an upside breakout.
Energy G I A N T Exxon has been left behind on this stock market rocket to new ALL TIME HIGHS. XOM is a leading loser in the DOW down 8% in 2017 alone with a 52 week break even performance compared to the industrial index up 27%.
Over the last 10 years XOM has traded between $60 and $100 with the $80 midpoint an import price pivot.
In the last year Exxon has found a base at the $80 level to lean on.
The risk to reward favors a bull bias in XOM. The overwhelming negative sentiment can also be a contrarian signal to be a buyer.
A stock substitution strategy using options ties up less capital and has absolutely limited risk to the premium paid. An option instead of buying the shares also has greater staying power for long term trend development.
The July option has five months plus for Bullish development.
An In-The-Money option gives you the right to be long the shares from a lower strike price and costs much less than the stock itself.
The Options Way: Unlimited Upside Potential with Limited Risk.
An XOM long call option can provide the staying power in a potential bullish trend extension. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security. It is also important to buy options that payoff from only a modest price move.
There is no need to ONLY make money on the all but infrequent long shot price explosions.
Good Options can profit from only modest directional moves.
Any trade has a fifty/fifty chance of success. Buying options ITM options increase that probability. That Delta also approximates the odds that the option will be In The Money at expiration.
Buying better options are more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With XOM trading at $83.00, for example, an In The Money $75.00 strike option currently has $8.00 in real or intrinsic value. The remainder of any premium is the time value of the option.
XOM has not traded at $75 since the extreme market lows of 2016.
Rule Two: Buy more time until expiration than you may need — at least three to six months for the trade to develop. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right but only after the option has expired premature to the market move.
Trade Setup: I recommend the XOM July $75.00 Call at $9.25 or less. A close in the stock below $77.50 on a weekly basis or the loss of half of the option premium would trigger an exit.
An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.
The option also behaves much like the underlying stock with a much less money tied up in the investment. The Delta on the $75.00 strike call is 83%.
The July option has more than five months plus for bullish development. This option is like being long the stock from $75.00 with completely limited risk.
XOM has not been below $75 in more than a year.
The maximum loss is limited to the $925 or less paid per option contract, with a stop loss exit at $450 half of that premium. The upside, on the other hand, is unlimited.
The XOM option trade break even is $84.250 or less at expiration ($75.00 strike plus $9.25 or less option premium). That stands $1.25 above the current price.
If shares recover to the modest $90 close of 2016 price, the option would be worth $15.00 for a 67% return on investment.