An options trade on an oil giant before earnings with crude on the move higher
Over the past couple of weeks, energy stocks have outperformed as investors have moved away from technology, consumer discretionary and, well, everything else. I’ll breaking down my market view and then describe a possible trade on a big energy stock into earnings. Market breadth, a crucial concept in stock markets, plays a pivotal role in assessing the strength or weakness of a bull or bear market. It signifies the extent to which multiple stocks are involved in a market trend. The recent market rotation has expanded the bull market, a positive sign indicating that gains are spreading across various sectors and industries, reflecting investor confidence and widespread buying. I’ve heard that this year’s bull market was narrow. It doesn’t appear now if the “narrow rally” narrative was true. Reviewing the Russell 1000 Index data, a cap-weighted, large-cap index, the data through Friday suggests otherwise. Sixty-four percent of the constituent stocks in the index are higher year-to-date. Within the index of the 41 energy companies, 32, or 75% of them, are higher. Several energy companies, including the three largest US-based integrated oil companies, report earnings this week. The largest, Exxon Mobil (XOM) , is up 18% year-to-date, while Chevron (CVX) trades at a slight valuation discount to its larger competitor and is up 5%. Conoco, the smallest of the three and with the most geographic concentration/exposure to the Permian, is down slightly more than 5% in 2024. Exxon is up slightly this week as oil inches higher on Middle East tensions. It reports Friday before the bell. XOM YTD mountain Exxon, year-to-date Crude prices and energy stocks are, technically, mixed bags. Only 5 of 22 technical indicators are bullish for the XLE ETF , which tracks the Energy Select Sector Index. While the technical indicators improve to 9 of 22 for WTI crude oil and 10 of 22 for Brent, that’s still not overwhelmingly positive. That Exxon, as the most expensive integrated oil company, is still “cheap” at 12.5 times price to earnings and with an enterprise value to EBIT of 9.5 times doesn’t provide much consolation 5% off the highs of the year when one realizes these multiples are actually about average — hydrocarbon energy companies tend to trade at steep discounts to broad market multiples as investors forecast transitioning to greener energy sources. The trade So, what should an investor do going into earnings? The good news is that options premiums are still quite low. The trade: Bought XOM $120 call Dec. 20 One could purchase the December $120 calls, close to the year’s highs, for just over $5 a contract. If the stock falls post-earnings, a trader could sell some downside puts at that point to help offset the premium spent. If the stock rallies post-earnings, look to spread. DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
