Exxon Mobil is showing extremely low implied volatility, with an IV percentile of 1%. That means the oil stock's current level of implied volatility is lower than 99% of all other readings in the last 12 months.
That could mean it's a good time to look at positive-vega trade such as a long strangle.
A long strangle is constructed through buying an out-of-the-money call and an out-of-the-money put. The trade aims to make a profit from a big move in either direction by the underlying stock, or from a rise in volatility.
Buying a long strangle is cheaper than a buying a long straddle, but will still suffer from time decay. That means the options will lose a little bit of value with each day that passes if the stock doesn't make a big move.
Oil Stock Trade's Impact From Time Decay
With a long strangle, the further out in time the trade is placed, the slower the time decay, but the options are more expensive and require more capital.
For Exxon Mobil, a long strangle could be placed by buying a 130 strike call and a 110 strike put for the Aug. 16 expiration. The call was trading around $0.90 late Tuesday, and the put around $1.40.
When we add the two together, the total cost of the trade would be around $2.30 per contract, or $230.
This is the total amount of risk in the trade and the maximum that could be lost.
The break-even prices are calculated by taking the strike price plus and minus the cost of the strangle.
That gives us break-even prices of 108.60 and 131.40. But profits can be made with a smaller move if the oil stock's move comes earlier in the trade.
For example, the estimated break-even prices in mid-June are around 114 and 125.
Changes to implied volatility will have a big impact on this trade and the interim break-even prices. So it's important to have a solid understanding of volatility before placing a trade like this.
Exit Strategy For Oil Stock Option Trade
The ideal scenario is a large move in either direction within the first week or two of the trade.
The worst-case scenario with this Exxon Mobil long strangle would be a stable stock price, which would see the call and put slowly lose value each day. For a long strangle, I usually set a stop loss at around 20% of capital at risk, which would be around $50, and a profit target of around 40%.
I also wouldn't hold the trade any longer than June 30.
According to the IBD Stock Checkup, Exxon Mobil is ranked No. 7 in its industry group. It has a Composite Rating of 69, an EPS Rating of 69 and a Relative Strength Rating of 67.
It's important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
