Impressive Trump Victory Forces a Closer Look at Exxon Mobil (XOM)

By Josh Enomoto

One of the repeated claims by now-President-elect Donald J. Trump, is that prominent ally Robert Kennedy Jr. can take charge of public health. However, Trump has been adamant that the one-time senior attorney for the Natural Resources Defense Council won’t influence oil and gas policy. These sectors will apparently come under the exclusive purview of “The Donald.”

If so, Trump’s impressive performance — defying a range of well-respected polls — could set the stage for long-term gains in Exxon Mobil (NYSE:XOM). One of the world’s hydrocarbon behemoths, Exxon recently delighted investors with its third-quarter earnings report. In particular, key financial metrics came in ahead of consensus estimates, largely due to record production in the Permian Basin.

Since the start of the year, XOM stock has gained over 16%. During Tuesday’s afterhours session, shares gained almost 0.7%. With international markets responding positively to the implications of a second Trump term, oil should swing higher. In turn, this framework should likely bode well for the hydrocarbon giant.

To be sure, you can always buy XOM stock in the open market. However, shares now trade hands at $121, which means that the law of large numbers is in effect. If you want more juice, you’re going to have to turn to the options market.

Taking a Measured Bet with a Bull Call Spread

A key element that makes options enticing for speculators is that the derivative price or premium is always smaller than the actual asset’s price. That helps provide options with their leverage but there’s a catch: you must buy 100 times the premium since each option typically controls 100 shares of the underlying security. This cash outlay can get expensive, depending on the strike price.

To get around this problem, retail traders often acquire options featuring far out-the-money (OTM) strike prices. While this tactic reduces the debit paid for the option, most of the time, it’s a waste of money. Because the option is far OTM, it’s extremely unlikely to be profitable. Fortunately, there is a way to reduce the debit of your option, thus opening the doors to more realistic propositions.

Regarding XOM stock under a second Trump term, a bull call spread could be very enticing. The idea is that you’re still buying a call option in the hopes that it rises in value. But at the same time, you will sell a call at a higher strike price (of the same expiration date). The premium received (credit) will help reduce some of the debit of the long call.

Of course, by selling a call, the reward will be capped to the level represented by the short leg’s strike price. However, by buying a bull call spread with a near-term expiration date, you can minimize the potential opportunity cost. After all, every option will reach expiration. Second, by selling a call and receiving a credit, you’re actually lowering the threshold to profitability.

For example, if you had simply bought a call, the price of the underlying security must rise to the strike price plus the premium paid to break even. With a bull call spread, this breakeven point is lowered by the credit received from the sold call.

Deploy the call spread effectively and you can potentially enjoy significant gains.

A Clear Idea Stands Out for XOM Stock

To filter out compelling prospects, it’s important to establish a baseline trade. That can be accomplished quite easily through a stochastic calculation. Let’s work through one example.

Following Tuesday’s close, the implied volatility (IV) of the options chain expiring Dec. 20, 2024 sat at 22.81%. There were 45 calendar days to expiration, with XOM stock closing at $118.96. We will take the product of the share price and the IV, and multiply the result with the time decay adjustment; that is, the square root of the days to expiration divided by 365 days. This exercise gives us a result of $9.53.

That means on the positive side, the market is expecting at most a swing to $128.49. Only two bull call spreads can “fit” this maximum outcome: the 115C/125C spread and the 110C/125C spread. Of these, I prefer the former because only $474 is spent for the chance to generate $526 in profits. With the latter, $864 is at risk to potentially generate $636.

It must be said that the breakeven price for the latter spread is only $118.64, below Tuesday’s close, as well as current levels. However, because XOM stock will likely rise due to Trump’s victory, taking the more conservative bet may impose an unnecessary opportunity cost.

Disclaimer: The author did not hold a position in any of the securities mentioned above. The information provided in this article is for educational and informational purposes only and should not be construed as investment advice. Always conduct your own research or consult with a licensed financial professional before making any investment decisions. Past performance is not indicative of future results.