Exxon Mobil was added to the SwingTrader portfolio on Friday as it broke out to a new high.
Income investors may also be interested in XOM stock for its above-average 3.05% dividend yield.
Last week, we looked at a long-term bull put spread on XOM stock. Another way to play it is via a cash secured put.
A cash-secured put is a slightly less bullish trade than buying the stock. It is considered a neutral to slightly bullish trade.
A cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal is to either have the put expire worthless and keep the premium, or be assigned and acquire the stock below the current price.
An Easy Way To Start Trading Options
Selling put options is an easy place for investors to start with options. They are like a covered call and are pretty easy to understand once you know the basics.
Traders selling puts should understand that they may be assigned — i.e., forced to buy — 100 shares at the strike price.
Let's look at an example using XOM stock.
With the stock closing at 119.17 on Friday, investors could sell an April 21 put with a strike price of 115 for around $3.95.
An investor selling this put would receive $395 into the account, which would be theirs to keep. If XOM stock falls below 115 by April 21, traders would be required to buy 100 shares at 115, or $11,500. The effective net cost of the position would be 111.05, thanks to the option premium received.
That is 6.81% below Friday's closing price.
Potential Return Of 3.5% Or 19% Annualized
If the stock stays above 115 at expiry, the put expires worthless, leaving the trader with a 3.56% return on capital at risk.
That works out to be a 19.09% return on an annualized basis.
The main risk with the trade is similar to outright stock ownership: If the stock falls quickly, the trade will suffer a loss. However, the premium received will help offset the loss.
The maximum loss on the trade would occur if XOM fell to $0, which would see the trade lose $11,105. But most traders would cut losses long before then. The suggested stop loss is if the stock closes below the Feb. 9 low of 114.18.
Cash-secured puts are a great way to generate a return on strong stocks, potentially without ever having to take ownership.
According to the IBD Stock Checkup, XOM stock is ranked No. 7 in its group and has a Composite Rating of 89, an EPS Rating of 77 and a Relative Strength Rating of 93.
If the put does get assigned, the investor takes ownership with a reduced cost base. Potentially, the investors can begin selling covered calls to generate additional income from the position.
XOM Stock Earnings Come After Expiration
Exxon Mobil is not due to report earnings until late April, so this trade should have no earnings risk.
Please 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 Twitter at @OptiontradinIQ
