Exxon Mobil Corporation (XOM)

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Exxon Mobil's Stellar Earnings Lead To A Short Put Income Play
By: Barchart | February 3, 2023

Exxon Mobil (XOM) reported stellar earnings on Tuesday, Jan. 31, although its free cash flow (FCF) was down significantly from the prior quarter. However, the options market shows that XOM stock has peaked recently. But shorting its puts still provides a good income play.

For example, near-dated expiration puts and calls have deflated significantly. The option premiums have withered as the stock did not take off. In fact, on Wednesday, Feb. 1, the day after its earnings release, XOM stock was down 1% to $114.74.

Analysts and investors might have found it disconcerting that the company's FCF fell from $22.05 billion in Q3 2022 to $12 billion in Q4. In fact, FCF a year earlier in Q4 2021 was higher at $15.01 billion.


Exxon Mobile Corp - Q4 Earnings Release - Jan. 31, 2023

But so what? The company still is buying back huge amounts of shares and paying out a hefty dividend. In fact, Exxon said that it increased and extended its share-repurchase program with up to $35 billion of cumulative share repurchases in 2023-2024.

That implies it will buy back $17.5 billion on average for both years, compared to $14.9 billion in share repurchases in 2022. That means that the company will increase its buybacks by 17.5% over the next two years.

Put Options Still Attractive For Income Plays

In my last article on XOM stock on Jan. 24, I wrote that the put prices for the expiration period ending Feb. 17 were very attractive. For example, the $107 strike price puts, which were 5.1% below the spot price of $112.76 traded at $1.53 per put contract. But as of Feb. 1, those same put contracts are now down to 61 cents at the $107 strike price. In other words, the investor who shorted them, as I suggested then, has made very good money as the premiums were overvalued.

Now, it might make sense to look at the March 3, 2023, expiration period for the put prices. For example, the March 3, 2023, $107 strike price puts trade for $1.18 per put contract as of Feb. 1, 2023. That strike price is still 6.75% below where the spot price closed on Feb. 1 ($114.74).


XOM Puts - Expiring 3/3/23 - As of Feb. 1, 2023

In other words, the investor who puts in an order to “sell to open” 1 put contract at $107, will secure $10,700 in cash and/or margin with the brokerage firm (i.e., 100 shares x $107). The investor's account will then immediately receive $118 per put contract. So the total yield is then $118/$10,700 or 1.1%.

If this can be repeated each month over the next 12 months, the annualized yield would be 13.2%. That is even better than the 3.14% dividend yield for investors who own the share in long positions.

Granted, the short put investor does not earn any kind of unrealized gain should XOM stock rise again. And if the stock falls below $107 on or before the expiration date, the put premium might rise above the $1.18 price at which the put investor shorted the $107 put. However, keep in mind that the stock will have to fall below $105.82 or $8.92 below the spot price of $114.72 on Feb. 1. That means it will have to fall more than 7.77% over the next 30 days.

And even if it does, it will allow the short put investor who hangs on to buy XOM stock at $107 per share. This allows the investor to get a slightly higher dividend yield at a lower entry price. In fact, they could even turn around and sell short out-of-the-money covered calls.

This shows that investors can still make good money shorting XOM puts for near-term expiration periods.

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