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Exxon Mobil Corp(XOM-N)

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Exxon Mobil Stock Offers a Good Yield, Low P/E and Short Option Income Plays

Barchart - Wed Aug 10, 12:21PM CDT
Energy - An oil tanker out at sea

Exxon Mobil (XOM) reported better than expected Q2 earnings on July 29. Its earnings per share of $4.14 for the quarter came in 25 cents higher than analysts' average forecast, according to Seeking Alpha. In addition, analysts put the stock on a cheap forward P/E of just over 7 times for 2022 and 8.6x for 2023.

That makes the stock very cheap and along with its existing 3.86% dividend yield, investors are being paid very well. In fact, in the past 19 years, Exxon has increased its dividend every year, and come October investors can expect this will happen again.

For example, in the last year, Exxon raised its quarterly dividend by 1 cent to 88 cents. I suspect it will do the same this year to 89 or 90 cents, putting the annual dividend at $3.60. So, at today's price of $91.26, this could raise the yield to 3.95%, or almost 4%.

Exxon - Investor Relations

Given how stable the company's earnings and dividends are, this makes XOM stock ideal for creating income through short options. Investors will find that that the stock also provides good monthly short put and call income opportunities. They can create income each month by shorting out-of-the-money (OTM) puts and calls. 

Here are some examples of how that can be done.

Shorting XOM OTM Puts Provides Attractive Yields

It turns out that since investors expect oil and gas prices will fall, they expect XOM stock will tumble over the next month. This raises the put option premiums to a higher than normal level and provides attractive income plays.

For example, look at the Barchart put option chain below.

XOM - Puts Expiring Sept. 9 - Barchart - As of Aug. 10

This shows that the $85 strike puts that expire 30 days from now on Sept. 9, trade for $1.44 per contract. Here is what that means to the income investor. He can short cash-secured puts (i.e., leaving $8500 in cash in his account to potentially purchase the stock at $85 per share if XOM falls to $85 by Sept. 9) and immediately receive $144 in his account.

Therefore, that works out to a very good yield of 1.69% over the next month (i.e., $144/$8500). Annually that represents a return of over 20% if it can be replicated each month and the stock does not fall to this level. Keep in mind that there is a good margin of safety here. XOM has to fall from $91.26 to $85 per share by Sept. 9 even if the puts are exercised. 

That $6.26 decline or 6.9% from today's price provides a benefit to the investor. For example, let's say that happens. Now the investor gets to buy the stock with a 4.235% dividend yield (i.e., $3.60 dividend per share assuming XOM raises it, divided by the $85 purchase price).

Moreover, at that point, the investor can turn around and sell covered calls. This is what is known as the “wheel” strategy.

Selling Covered OTM XOM Calls

The next under table shows that OTM XOM calls are also an attractive way to create extra income with Exxon stock.

XOM - Calls Expiring Sept. 9 - Barchart - As of Aug. 10

The Sept. 9 calls at the $97 strike price offer an investor $102 per contract. Based on today's price of $91.26, the investor buys 100 shares for $9,126 and immediately receives $102 when shorting these OTM-covered calls. That works out to an annual monthly yield of 1.12%, or 13.4% annually if it can be repeated over the next year.

This assumes that the stock does not rise from $91.26 to $97.00, which it could. If that happens the investor receives an additional 6.29% capital gain return. And if the stock falls, the additional income from the covered calls helps reduce the loss. Each month this can be repeated, along with the short put strategy, providing the investor plenty of extra income along with the 3.86% dividend yield.

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Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.