Exxon (XOM) stock has done well over the last month, making money for investors who shorted puts in out-of-the-money (OTM) puts. XOM stock is up over 2.4% in the last month to $114.51 on April 4. That means that OTM puts have expired worthless and investors have kept the full yield they made when shorting the puts. This short put trade still looks good with strong oil and gas prices.
For example, last month in my Feb. 21 article, “Exxon's 3.27% Yield Is Attractive, But Short Put Income Plays Are Gaining Attention,” discussed shorting OTM puts for expiration on March 24. This theme is still in play, as XOM stock still has an attractive 3.18% dividend yield with its $3.64 annual dividend.
Moreover, the oil and gas company is continuing to gush huge free cash flow (FCF) as I wrote in my article on Feb. 3, “Exxon Mobil's Stellar Earnings Lead To A Short Put Income Play.” As a result, I wrote that Exxon's $35 billion share repurchase plans will lead to $17.5 billion in stock buybacks over the next two years. That represents 3.7% of its $472.8 billion market capitalization.
It seems likely that Q1 likely showed very strong FCF as well, since oil and gas prices, although down from Q4, are still strong. This means that investors can probably keep on shorting out-of-the-money put options going forward as an income play.
Shorting XOM Stock Put Options
For example, in my Feb. 21 article, I pointed out that the March 24 expiration $104 strike price put options traded for $1.34 per contract. This provided an immediate 1.087% put-to-strike price yield, which has since expired without having to be exercised. This strike price, 31 days to expiration, was 6.68% away from the spot price. Let's see if a similar trade can be executed now.
There is. The May 5, 2023, expiration put chain shows that the $107.00 strike price, which is 6.69% away from today's price of $114.51, trades for $1.19 per contract. That implies an immediate yield of 1.11%.
For example, if an investor secures $10,700 in cash and/or margin with their brokerage firm, they can then enter an order to “Sell to Open” one put contract at $107.00. That immediately brings in $119.00 to the account. So the return is $119/$10,700 or 1.11%, which also equals 13.3% if it can be repeated each month for a year.
An added advantage of this particular trade is that Exxon is likely to report its earnings before the put trade expires, which could be a catalyst for the stock. As a result, there is a very high chance this short trade will expire worthless, which is exactly what a short put investor wants to see.
But even if it doesn't, and the stock falls to $107 or below, the investor automatically buys at a level where the dividend yield is higher than today. For example, the $3.64 dividend equals a 3.4% yield at $107.00.
Granted, the investor would likely have an unrealized loss at that point. But at least it would be less than today. In addition, the investor would be long XOM stock and they could turn around and short OTM calls to reduce their cost even further. This is known as the “wheel strategy.” In any case, today's put premiums look very attractive for investors in XOM stock.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
