With a more volatile market, it makes sense to start looking at other options strategies to take advantage of the situation. Exxon Mobil is showing high implied volatility at 28.6%. It's the highest level of volatility we have seen for this stock in 12 months. As option traders, we can use a short strangle to collect premium with the high implied volatility of Exxon Mobil stock.
A short strangle involves selling an out-of-the-money put and an out-of-the-money call with the same expiration date, usually on either side of the current price.
Short Strangle Setup
This trade generates a large amount of premium for the option seller, but it does come with risks. A short strangle is an unprotected trade, sometimes referred to as a "naked" trade. Naked options can be risky as they expose the trader to potentially unlimited losses if the stock makes a big move.
However, if the trader is right and the stock trades sideways, the trader gets to keep the full premium.
Assuming a trader believes that Exxon Mobil stock will trade sideways over the next few weeks, they could look to sell an April 17, 100 put and an April 17, 115 call.
The 100-strike put traded around $1.95 this morning and the 115-strike call traded around 70 cents.
Selling those two options generates a total of $265 in premium. That is the maximum possible gain on the trade if Exxon Mobil stock closes between 100 and 115 on the day of expiration.
Managing The Option Trade
To work out the break-even price of the trade, take the lower strike price of 100 on the put minus the total premium received of $2.65 per share. That puts the lower break-even point at 97.35.
Then on the call side, take the call strike of 115 and add the premium which gives 117.65 on the upper break-even point. Going outside of that range at expiration is where you will start to incur losses.
This trade is a short vega trade which means if implied volatility increases early in the trade, losses could occur.
Short strangles are an advanced option strategy, so if all that sounds confusing, it's best not to trade them. Plus, with a trade like this, the potential losses are unlimited and a lot higher than the potential gains. Many traders find that hard to stomach. It requires a higher level of confidence that Exxon Mobil is going to remain relatively flat over the course of the trade.
A stop loss could be placed if Exxon Mobil starts to veer above or below the short strike prices.
Exxon Mobil Stock Ratings
According to the IBD Stock Checkup, Exxon Mobil stock ranks No. 10 in its group. Further, it has a Composite Rating of 54, an EPS Rating of 54 and a Relative Strength Rating of 36.
Since Exxon Mobil is set to report earnings in late April, 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 X/Twitter at @OptiontradinIQ
