Exxon Mobil - Natural Gas Options Play

| About: Exxon Mobil (XOM)
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While Exxon Mobil (NYSE:XOM) is probably more well-known for the development and distribution of liquid-related sources of energy, the company in its Energy Outlook Conference Call held on December 11, 2012, noted it is now North America's largest holder and producer of natural gas.

Due to new drilling techniques, supplies of natural gas have mushroomed, which has also caused the price and profits associated with natural gas to drop. With natural gas prices at historic lows, Exxon Mobil appears to have made a sucker bet on the commodity. However, the age-old wisdom of buying low and selling high may be more of a consideration going forward.

In Exxon Mobil's Energy Outlook Conference Call, the company indicated 1.3 billion people currently do not have access to electricity, which represents a lot of room to grow. Additionally, with the large supply of energy being developed in North America, the company expects the region to become a net exporter of energy in the future. Also, while the price of natural gas is very low in North America due to the large supply, the price of natural gas is regional, and is not at a low price in other geographical regions. At some time, the price of natural gas should equalize, and the price for natural gas produced in North America should increase -- and Exxon Mobil could stand to benefit handsomely as a result.

Exxon Mobil's stock price was in a trading range between $82 and $88 over the first part of the previous year, took a dip in June, and peaked in October, as shown below:

The company's stock price is now just off of its earlier-in-the-year support level around $84.

Exxon Mobil appears poised to take advantage of natural gas when the price returns to equilibrium, so consideration for an investment in the company is in order. However, with the "fiscal cliff" and "debt ceiling" in the news, a protected investment should be considered. A married put is a protected option strategy that provides unlimited upside with limited downside. So, if the price of the stock advances, the investor is rewarded, and if the price of the stock declines, the investor is not penalized too much. A married put position may be entered by purchasing a put option against a long stock. The put option is typically selected for expiration several months in the future in order to reduce the per-day cost of the "put insurance."

Using PowerOptions, a variety of married put positions for Exxon Mobile were found for July 2013 expiration, as shown below:

The married put position using the 2013 Jul 87.5 put option looks attractive with a maximum potential loss of 5.1% -- before consideration for expected dividend payments. When considering expected dividend payments during the holding time period, the maximum potential loss is reduced to 4%. So, even if the price of the stock drops to zero, the maximum loss that can be sustained is 4%. The specific put option to purchase for the married put position is the XOM 2013 Jul 87.50 put option with a price of $5.70.

Exxon Mobil Married Put Trade

  • Buy XOM (existing or purchased)
  • Buy XOM 2013 Jul 87.50 put at $5.70

A profit/loss graph for one contract of the Exxon Mobil married put position, including consideration for expected dividend payments, is shown below:

For an increasing stock price, the married put investment also increases. For a stock price below the $87.50 strike price of the put option, the value of the position remains unchanged. And, if the price of the stock increases to above the $87.50 strike price of the put option, income methods may be applied in order to receive income and reduce risk, as taught by RadioActiveTrading.com.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.