Exxon: Gaining Exposure to Inevitable Rising Oil Prices

Includes: OIL, XOM
by: Daily Trading

In November 1989, I was reading a newspaper during a lecture, partly because the lecturer was awful and partly because I was reading that the Berlin Wall had fallen. The very wall that a few weeks before Erick Honicker had stated would stand for "a hundred more years".

I was now looking at images of people celebrating next to guards who yesterday would have shot them dead. Surrealism worthy of Dali or Man Ray.

The sudden decline of communist Europe took the world by surprise. We knew it was coming, but the speed at which it unraveled was stunning. Even more stunning, brutal regimes were removed without major violence and bloodshed. Simultaneously across Poland, Hungry, Austria, East Germany and Czechoslovakia.

We have now seen social unrest in Algeria, Egypt, Tunisia, Morocco, Yemen, and Jordan, with inflation being one of the forces responsible. On this theme, Bloomberg has an interesting article reporting on the effects of inflation on the major western economies, and this Times article discusses global food price increases. The speed with which this change is occurring is probably underestimated by even experienced observers.

Crude oil prices have been steadily rising recently. Even without the recent drama, we are of the opinion that this trend will continue.

Times of great uncertainty are also times of great opportunity for traders and investors. Crisis = Opportunity is one of our mottos.

To gain exposure to our view of rising crude oil prices, we see Exxon (NYSE:XOM) as one of the best risk/rewards trades. It is far from being fundamentally expensive, price to book ratios compared to both its competitors and the S&P500 mean are fair. Price wise, it is still below its all time high. We believe that XOM will move materially should crude oil spike. Furthermore, XOM options are trading at one of the lowest S&P100 Implied Volatility levels.

XOM is currently trading at just below $80. Should crude move above its previous spike at $150, then XOM will most likely exceed its previous high of $95, and perhaps move considerably higher.

We particularly like Jan 13 strike 110 calls XOM, at around $0.60 ($0.51 yesterday)

We can purchase 20 contracts for around $1200, giving an exposure of $220,000 if XOM moves above strike by Jan 2013 (20 x 100 x 110).

Real money is made by positioning for moves for which no one thinks will happen.

Disclosure: I am long XOM.