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Exxon Mobil Option Players Are Wary Ahead of Earnings

Breaking down a bearish options spread on XOM

by 1/31/2013 1:16 PM
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Option traders are building bearish bets ahead of Exxon Mobil Corporation (NYSE:XOM - 90.25) earnings, with puts flying off the shelves at nearly six times the normal pace. In early afternoon action, the blue-chip commodity concern has seen roughly 85,000 puts change hands, compared to just 14,000 calls.

A healthy portion of the volume is attributable to a bearish spread strategy centered around the July 77.50 and 87.50 puts. More specifically, symmetrical blocks of 30,000 contracts traded at each strike -- the 77.50-strike puts at the bid price of $0.90, and the 87.50-strike puts at $2.79, closer to the ask price. Or, in simpler terms, the speculator bought the higher-strike puts, and hedged his bets by selling the lower-strike puts, resulting in a net debit of $1.89 per pair of contracts for the bear put spread.

The goal of the play is for XOM to retreat within the next several months. However, instead of simply buying the July 87.50 puts, the speculator trimmed both his breakeven rail and maximum risk, should the stock soar in the wake of tomorrow's earnings release. Now, the investor will make money if XOM breaches the $85.61 level (bought put strike minus net debit), and is risking just $1.89 per pair of contracts. On the other hand, the sale of the July 77.50 puts also caps his maximum reward at $8.11 (difference between strikes minus net debit) per pair of puts, no matter how far XOM should sink south of $77.50.

From a broader sentiment perspective, today's pessimistic options skew is just more of the same for XOM. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open almost two puts for every call during the past two weeks. What's more, the stock's 10-day put/call volume ratio of 1.85 registers in the 85th percentile of its annual range, pointing to a healthier-than-usual appetite for bearish bets of late.

In the same vein, the equity sports a Schaeffer's put/call open interest ratio (SOIR) of 1.08 -- above 74% of comparable readings of the past year. In other words, near-term options traders are more put-heavy than usual at the moment.

At last check, XOM has given up 0.5% to explore the $90.25 vicinity, and is on pace to end south of its 10-day trendline for the first time in 2013.

Historically, the company has missed Wall Street's bottom-line earnings projections in two of the past three quarters, Thomson Reuters reports.


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