XOM Stock – Selling Puts By Design Part 2

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Xom stock has recently taken quite the tumble from its high in April 2011 of $88.00 to the recent low on August 10 of $67.46. This represents a loss of $20.54 or 23%. This type of loss is normally seen in bear markets. Just as the overall stock market goes from bull to bear and back to bull, so can individual stocks or sectors.

Overall the energy sector, oil in particular has seen a dramatic sell-off and XOM stock has not been left unaffected by the decline. Whether or not it is warranted does not concern me and shouldn’t concern any investor who is using options to gather income to eventually own shares in some of the best companies in the world. Exxon Mobil stock falls into the category of best of breed and certainly XOM Stock is well worth owning as oil and oil by products will be in wide use for decades if not centuries to come.

In my article Microsoft Stock – Selling Puts By Design, I discussed how selling put strikes to eventually be assigned shares at deeply discounted prices is a strategy that I employ not randomly but through design. In this the second part, I will take the same approach and look at my recent XOM Stock puts including those I sold on September 6 2011, to conclude the overview of selling puts by design. If you have not read the first article I would suggest starting there as some of the concepts mentioned in the first article will be assumed to have been understood in this, the second article.

XOM Stock – Historic Perspective

Through my strategy of selling puts by design NOT randomly selecting put strike points, I go back at least 5 years to review the past performance of XOM stock and also study the stock during the most recent bear market. In the case of Exxon Mobil stock, the chart below shows 2006 to 2011 in XOM Stock.

Xom Stock - 2006 to 2011 chart

The above historic chart shows that the worst of XOM stock prices did not in fact come during the market panic of 2008 to 2009. Instead the worst was in early July 2010 when XOM stock hit a low of $55.94.

XOM Stock – Year To Date (Jan 2011 to Sep 8 2011)

More recently the stock on Aug 10 2011 hit a low of $67.46. Since the start of this year (2011) XOM stock shows all the classic signs of a stock in a bear market. Double top, falling prices, then a run up but not a new high and then a second collapse, much worse than the previous two tops. The chart below tells the tale. This is typical of a bear market in a stock. The stock is now in a consolidation phase and will either break higher which is somewhat doubtful or meander lower which is my outlook.

XOM Stock - Jan 2011 to Sep 8 2011

But should I be concerned about Exxon Mobil Stock when I see the above year to date chart? Only to a small extent. Based on the 5 year chart my focus would be to get my trade in XOM Stock to the point where my cost basis, if assigned shares, would be lower than $55.00. Right now at the $62.00 strike area, the stock should have a lot of support, based on the past 5 years of XOM Stock, which gives me some time to sell more puts and gain more income to reduce my overall cost basis if XOM stock should be assigned.

If you look at my XOM Stock trades for 2011 by clicking here, you will see that on Aug 5 and Aug 8 I took a loss from my capital earned to buy back my Aug $75 put strike and Sep $75 put strike. This was based on two factors; the first was the above year to date chart which told me that the stock was in a bear market and would definitely fall a lot lower than $75.00, which it did. Second was the fact that if assigned at $75.00 even with the capital I had already earned and factoring in rolling out my Aug $75 puts to avoid being assigned in August and again rolling out my September $75 puts in September, I would own the shares at a price point above $55.00 which as per the above 5 year chart, could easily be reached by XOM Stock.

On August 5 before I bought to close my Aug and Sep $75 puts, this was my position:

XOM Stock if assigned: 1000 shares at $75.00  = $75,000.00
Capital earned to Aug 1                                        =   13,120.00
Total of my own capital required if assigned: – $61,880.00

Cost basis in XOM Stock = $61.88.

This is $6.88 above my preferred cost basis of $55.00. Because of this, it is an easy decision when XOM stock pulled back, to buy back the sold puts for a loss and sell puts at lower strikes.

This is why having a historic perspective such as the 5 year chart above assists in making the decision easy of when to buy back sold puts, take a loss and sell puts at lower strikes. It also removes any emotion from the trade. As soon as XOM stock began a decline and I looked at the Year To Date chart above as I could see that I had a good chance of being assigned at $75.00 and probably for both months. I then simply stepped in, bought to close the $75 put strikes and sold the puts lower which brings my cost basis in line with my goal of $55.00.

Leaving aside the amount of capital I earned when I first sold the Aug $75 and Sep $75 put strikes, it cost a total of $3096.50 to buy to close my Aug and Sep $75 put strikes. I then sold the Oct $60 strike, the Sep $60 strike and on Sep 6 the Oct $55 strike. The total amount earned from these three strikes was $1784.75, but more importantly my cost basis in XOM Stock should I be assigned, is now reduced to $51.61, which is far below my goal of $55.00.

If XOM stock should collapse further and I be assigned at $51.61, the dividend would be 3.6% and based on the 5 year chart I would be in the stock at an exceptionally low cost basis.

XOM Stock – Selling Puts By Design Summary

I hope by presenting this second article on selling puts by design, readers will look at put selling from a different perspective. My XOM Stock put trades are great examples of the value of considering selling puts not randomly but by design.

There are many benefits to selling puts by design including:

No emotion in the trade. As investors know it is emotion that is the biggest obstacle to investors making good decisions, particularly in stock declines.

No second guessing. I never need to wonder should I close or not close the sold puts. Should I move lower or not move lower. Should I wait another day, another week, another month? These questions are all answered in advance so when the situation arises I simply follow the design.

It also provides not only income to reduce the cost of the eventual assignment of shares, but also protection so that in the event of a market decline I know that should I be assigned shares, it will be at a lower cost basis, that provides ample opportunity for selling covered calls for profit along with some possible capital gain as XOM stock recovers.

The benefits of selling puts by design rather than randomly are obvious in all my trades including my XOM Stock trades for the past two years.