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Investor sells longer-dated puts and calls betting on minimal movement in the oil and gas name
Related Symbols: XOM
A strangle sale in Exxon Mobil Corp. (NYSE: XOM) during afternoon trading Thursday suggested at least one investor could be expecting the oil and gas company’s shares to remain around its current level throughout the next year.
XOM shares closed at $67.38 on Thursday, relatively unchanged during the trading session. XOM did not announce any news yesterday, but the stock remained near its highs after rallying 1.5% on Wednesday. XOM might announce earnings figures on April 29.
A look at time and sales in the January 2011 options expiration month shows a strangle seller, but with differing volumes. Around 30,000 January 2011 60 puts crossed for the bid price of $2.80 per contract, while 15,000 January 2011 75 calls traded at the bid price of $1.94 per contract. For a risk profile of this spread, consult the graph below and open your own free virtual trading account where you can access tools essential to stock and option trading.
At January 2011 options expiration, investors could make a maximum profit of $11,310,000 and will make money on this strangle if XOM shares close between $82.55 to the upside and $56.23 to the downside. This neutral strangle provides a bit of leeway if XOM shares climb higher than $75, but also provides less leeway for gains if the stock begins to drop below $60.
The January 60 puts were home to open interest of 32,000 contracts, and the January 75-strike calls were home to open interest of 70,000 contracts. This morning, open interest of these strikes has changed to 19,000 in the 60-strike and 85,000 in the 75-strike. This suggests that some of the puts were sold to close, but it’s clear that investors opened the short call positions. These puts closed down 13 cents on the day Thursday, while the calls dropped just seven cents on the day. Implied volatility of the 60-strike puts closed at 23%, and the 75-strike calls closed with an implied volatility of 20% compared to a 30-day historical volatility of 15%.
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