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September 6, 2013  Fri 3:47 AM CT

XOM: SEE CHART GET CHAIN FIND STRATEGIES
One investor is letting the bears pay for a bullish trade in Exxon Mobil.

optionMONSTER's Heat Seeker monitoring system detected the purchase of 9,000 April 105 calls for $0.25 and the sale of 3,000 April 70 puts for $0.81. There was barely any open interest at either strike before the transaction appeared, so new positions were initiated.

The trader collected a credit of $18,000 and now controls the equivalent of 510 shares in the oil giant. That correlation will increase exponentially if XOM rises and could translate to 900,000 shares if the stock goes above $105. A close at $110 on expiration would yield returns of $4.5 million, and $120 would produce $13.5 million.

XOM fell 0.47 percent to $87.35 yesterday. The stock is down almost 5 percent in the last month but is trying to hold support around the same $87 level where it peaked in 2011 and early 2012. That could make some chart watchers think that it's working its way higher, albeit slowly and arduously.

The unusual aspect of yesterday's option strategy is that XOM stands almost exactly between the two strike prices, yet the puts were much more expensive because they had greater implied volatility. Selling those contracts exploited the market's fears about a drop to finance an upside wager. (See our Education section for more on long calls and short puts.)

Disclosure: I own XOM shares.
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Education & Strategy

Sweet Spot Exceptions

As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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