Friday, January 29, 2010

Rolling the dice on XOM

Another name that reports on Monday 2/1/10 is XOM. Does not look like the market is expecting much. But I decided to buy 20 Feb '10 $70 call contracts for .11. I am risking $220 dollars. Take a look at the price slices below. In the first screen shot I left vol alone and then I adjusted it down by 5%. Historical vol is currently at about 14% and this option is trading with a vol of 19% so an adjustment of 5% would put it in line with historical.

The options market is only pricing in about a 3.8% move based on the front month straddle. This gives XOM an expected range of 62.75-67.70. Like I said this is just a gamble, but if it hits I could win the option lottery so to speak. Every once in a while I like to take these small bets just for fun. Have to fullfill that gambler inside.


  1. So on this trade you're expecting historical vol to catch up with current vol? instead of the current vol falling after earnings to match historical?

    I understand the need to fill the gambler itch, that's pretty much what my SPY put purchase was today. It's only a risk of $250. It does feel a bit odd to purchase pure time value when I've made so much over the years by selling time premium and watching it expire.

  2. No. Historical Vol is at 14% and the IV is at 27% (I accidently put the 19% IV of the contracts that I bought, but this would put IV on the contract to match HV), so I adjusted the model with a 5% decreas in IV to move down closer to HV to see the difference in price slices. The reason I only chose to go down 5% which would leave IV at 22% is because over the last year 22% is the 52 week low of IV.

  3. The other thing that I noticed on the chart is that the past four earnings releases had been at the top of rallies and then a sizable sale off after earnings occured. This time there has been a huge sell off from a high of $77 down do around $65.

    Not sure that means anything, but maybe it will have the inverse realtionship...

  4. XOM did beat and the stock is up. But not enough to yield a profit. I thought about keeping the trade on, but because the catalyst that I was looking for to propel the stock higher did not I cut the position for a break even trade less commissions. No reason to just through money away.

  5. So what happened on this trade? Did the stock move up but not enough to offset for a decrease in IV?