Exxon Mobil $XOM Sees Huge Put Buyer…

| August 20, 2015 | 0 Comments

bearishExxon Mobil $XOM Put Buyer Bets Big…

Something remarkable happened in the options market yesterday…

A well-heeled investor bet $54.3 million on additional downside in Exxon Mobil $XOM via October 16, 2015 $85 strike puts.

That’s a huge bearish bet on the world’s largest oil company.

Let me explain…

As you may know, $XOM stock has been suffering in 2015 along with nearly every other oil producer.  Shares of the oil producer are down 13.6% year-to-date and 19.6% lower over the past year.

Here’s a chart…

Exxon Mobil

As you can see, $XOM is stuck in a steep downtrend.  And while it’s certainly not great performance, shares of the crude producer have held up rather well relative to other stocks in the oil industry.

But now someone’s betting big that $XOM has more room to fall… 

By purchasing 60,000 contracts of the $85 strike puts, which were trading for $9.05 at the time of purchase ($905 x 60,000= $54.3 million), this trader clearly has a bearish perspective on $XOM.

But what’s most interesting (besides the fact this bet was made in the first place) is the trader chose deep-in-the-money (DITM) puts.

Remember, DITM puts and calls are not only much higher priced than their at-the-money and out-of-the-money counterparts, but they also have a much higher delta reading.

In fact, the $XOM October $85 puts currently have a delta of 0.91.

What does that mean?

For every $1 downturn in $XOM stock, these put options will gain value by $0.91.

Clearly, this trader stands to make a fortune if $XOM keeps trending lower!

Of course, there’s always the possibility our investor is hedging a long $XOM stock position with this put trade.  If Exxon shares are ready to drop, buying puts is a great way to reduce long stock exposure in the downfall.

However, it’s unusual for a hedger to buy DITM option contracts.

That’s why I think this trade is simply a big bearish bet on additional downside in $XOM.

What does all this information mean for oil industry stocks?

There are a number of important insights we can glean from this $54.3 million put bet on $XOM.

First of all, this well-heeled trader is convinced oil is not ready to bounce back to higher ground.

West Texas Intermediate (WTI) is currently carving out new yearly lows under $42.50 a barrel.  Given this big bet, there’s a growing chance the commodity drops into the high $30 a barrel range soon. 

Secondly, since this trader is essentially shorting one of the strongest players in the entire oil industry, there’s a very good chance oil stocks as a whole keep dropping to new 52-week lows.

As you may remember, I recently wrote an article suggesting a potential bottom in oil exploration stocks.  This big bearish bet in $XOM clearly counters that analysis.

Bottom line…

Yesterday’s hugely bearish bet in $XOM suggests oil and oil industry stocks have yet to reach a bottom.

Trade accordingly.

Until Next Time,

Justin Bennett

***Editor’s Note***  If you’d like to learn more about options trading and analysis, read my five part series on options trading basics, which starts here.

BIO:  Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com.  With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them.  Sign up for our free reports and commodity newsletter at https://commoditytradingresearch.com/free-sign-up.

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Category: Natural Resource Stocks

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.