While President-elect Donald Trump may truly be the comeback king, his unexpected ascent from the darkest depths of controversy has also helped spark optimism in oil and gas giant Exxon Mobil (XOM). Although the fossil fuel industry is an anachronistic one, I believe that Trump’s reelection will likely extend a new lease on life for XOM stock.
To be sure, the implied increase in production may serve to pressure crude oil prices. Naturally, that’s not going to be helpful for profitability. However, it’s important to consider the bigger picture. Under the outgoing Biden administration, the White House supported various green energy initiatives. Presumably, a Harris administration would have continued this directive. Now, the U.S. energy ecosystem may undergo a sharp course correction.
Another positive catalyst for XOM stock is the underlying company’s strong performance in the third quarter. Exxon posted earnings of $8.6 billion, driven by enterprise-wide transformations. Moreover, the company inked record-high liquid production and improved high-value product sales. Management anticipates sustained growth in these areas, boding well for XOM. As such, I am bullish on Exxon Mobil and view the company as a compelling options-focused opportunity.
Leveraging the Power of Options to Speculate on XOM Stock
With President Trump securing four years in the White House – and potentially Republican control of Congress in the first two years at least – XOM stock is theoretically a long-term bullish investment. Therefore, I’m not opposed to the idea of simply buying the security outright. However, acquiring call options is appealing because of their leverage of 100 shares.
Subsequently, I’m also not opposed to acquiring a Straight Call option. In this case, you would pay a debit (premium) for the right (but not the obligation) to buy 100 shares of XOM stock at a predetermined strike price. However, depending on what strike price you select and its moneyness, the premium for the call can be quite expensive. That’s where a Bull Call Spread can be very attractive.
In a Bull Call Spread, you buy a call and simultaneously sell a call at a higher strike price of the same expiration date. The credit or income received from the short call partially offsets the debit paid for the long call. This has the consequence of capping your maximum potential reward. However, the Spread reduces the threshold to profitability, making your long call a more realistic proposition.
Focus Only on the Most Viable Trades
With a giant blue chip like Exxon Mobil, it’s normal to see several potential Bull Call Spreads. However, not all optimistic ideas are built equally. In fact, I would argue that most trades should be avoided. Instead, options traders should focus only on the most promising transactions. We can filter out the bad from the good with a simple stochastic calculation.
Essentially, we want to take the target option chain’s implied volatility (IV) or the market’s expectation of movement and “reverse engineer” the anticipated range of mobility. To do this, we take the product of three metrics: the share price, the target chain’s IV, and the time decay adjustment (or the square root of the days to expiration divided by 365 days).
Let’s look at the expiration date of December 20, 2024. With 41 calendar days to expiration from Friday’s close, the expected price volatility clocks in at $6.23. That means XOM stock could potentially rise to $127.34 or dip to $114.88 by expiration. To be conservative, investors should only concentrate on Spreads with a short leg strike of $125 or lower to improve the chance of achieving maximum profitability.
Two Big Trades for Exxon Mobil Stand Out
Overall, the most conservative idea that arguably offers an ideal risk-reward balance is the 115C/120C Spread. Here, the short leg’s strike price is only $120. That means XOM stock only needs to not fall below this threshold by expiration to pick up the maximum payout of 44.93%. Nominally, you would put $345 at risk to potentially earn $155.
This trade could work out well if you’re unsure about where XOM stock may head over the next month or so. However, if the oil giant starts moving northward, you risk absorbing a heavy opportunity cost. Again, Bull Call Spreads feature capped maximum payouts. So, even if XOM skyrockets, the 115C/120C Spread will only provide a 45% payout.
For high-conviction bulls, you may consider the 120C/125C Spread. Here, both the long and short leg strikes are elevated. The breakeven price stands at $122.15, about 1% higher from Friday’s close. Enticingly, though, you would only be putting $215 at risk for the chance to earn $285 at expiration. That’s a payout of 132.56%.
Is XOM Stock a Buy, According to Analysts?
Turning to Wall Street, XOM stock has a Moderate Buy consensus rating based on 11 Buys, five Holds, and zero Sell recommendations. The average XOM stock price target is $137.13, implying 13.8% upside potential.
The Takeaway: Oil’s Paradigm Shift Presents an Opportunity in XOM Stock Options
Exxon Mobil stands to benefit from President-elect Trump’s policies, which could give the fossil fuel industry a new lease on life. With the likelihood of increased production, XOM may face pressure on oil prices, but the bigger picture looks positive. The company’s strong third-quarter earnings and growth in liquid production make it a solid idea for those eyeing opportunities in the oil sector.
For options traders, XOM stock offers a compelling setup, especially with strategies like the Bull Call Spread. By focusing on the most viable trades, such as the 115C/120C Spread, investors can limit risk while aiming for a robust return. More aggressive traders might consider the 120C/125C Spread for a higher reward potential.
