On Monday prior to Exxon’s (XOM) Q4 results yesterday, I detailed a defined-risk bearish trade idea in the stock, suggesting that weak results from peer Chevron (CVX) on Friday and the revelation over the weekend that the two companies discussed a merger last year, the weak technical set up and what was likely to be a poor outlook from XOM set the stock up for a pullback back towards $40. Here was the trade idea:
XOM ($44.75) BUY FEB 44 – 39 PUT SPREAD FOR $1.45
-Buy to open 1 Feb 44 put for 1.80
-Sell to open 1 Feb 39 put at 35 cents
Well, the stock has rallied, on seemingly bad news as crude oil has broken out this week… so for now I am wrong.
The Feb 44 – 39 put spread which cost $1.45 when the stock was $44.75 on Monday is now worth only 50 cents… this trade should be closed as the trade’s break-even is now nearly 10% away. The important point here is that this is now a lotto ticket, not a good risk-reward, and will very likely expire worthless in a little more than two weeks. As regular readers know, we like to use a 50% premium stop on losing directional trades as the probability of them expiring worthless dramatically increases beyond that point.