Bet on major share price decline by June.
Over 1,070 contracts traded on the June 2020 $40 puts on ExxonMobil (XOM), a 10-fold surge in volume based on the prior number of open contracts.
With a current share price of the major integrated oil company around $68 per share, the $40 bet implies a $28 per share downside in the next nine months, or about 42 percent. While such moves are common in many energy stocks, they’re unusual in major integrated companies such as Exxon.
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ExxonMobil shares have never traded under $60 in the past five years, let alone anywhere near a strike price of $40. However, shares of the oil giant are near five-year lows and could slide lower on a price decline in oil.
Action to take: Investors should look for any opportunity to buy shares of the company under $70. At that price, shares have a dividend yield north of 5 percent and the company’s long operating history makes it a solid buy.
Speculators looking at a further downside in oil in the next few months would be better buying an option such as the April 2020 $65 puts. This gives investors plenty of time for a further drop in oil, but at a strike price that shares could potentially drop to. The April $65 puts trade for around $3.75 or $375 per contract, a reasonable price for a hedge on a surprise drop in oil.