A Long-Term Play in Exxon Mobil (XOM)

Exxon Mobil options trading Dow component Exxon Mobil XOM saw some unusual option activity Tuesday as some option investors appear to have sold January 2012 80 calls (expiring in just under a year) and bought January 2013 90 calls (expiring in just under two years). Wednesday morning's open-interest translations suggest the 2013 calls traded to open (open interest rose from 473 contracts to nearly 17,000) the picture of the 2012 80 strike suggests that these were likely sold to close.

After seeing volume of more than 15,000 contracts trade on Tuesday, open interest dipped to 27,480 from 35,255 yesterday morning. It's likely, therefore, that the seller of these calls traded to close but some of the contracts were scooped up by other traders buying to open. This would account for an “unchanged” open interest for some of the contracts in question.

Around 12:30 p.m. Central Time Tuesday afternoon, a block of roughly 16,000 of the later-term 90-strike calls traded for the ask price of $3.05 apiece. Meanwhile, a block of nearly 15,000 traded for $4.35, going off near the mid price. Although the block sizes weren't identical in size, they were both flagged as a spread trade and hit the tape at the same time, indicating to me that they were related. The investor seems to have sold the spread for roughly $1.30 per spread.

Not only do the LEAPS positions have a year's worth more time value, but they also traded at a higher strike. In fact, the 90-strike calls are out-of-the-money by more than $11. Delta on the 2012 80 strike is 47; delta on the 2013 90 strike is 30. The shorter-term calls have a closer correlation (higher delta) to the underlying stock despite the reduced time value because they are basically now at the money.

Because these strikes differ in terms of both time (the calendar-spread element) and strike price (the vertical-spread element), this strategy is known as a “diagonal spread.” It likely indicates a bullish outlook, even as the investor is taking some money off the table, collecting 1.30. They are extending their option exposure to a later time frame and setting the strike price even higher. These January 2012 calls appear to have been bought gradually over the past two months at prices ranging from $1.60 to $3.30. As this trader was able to recoup some premium while continuing to remain invested in even longer-dated XOM upside calls, they are well situated if ExxonMobil continues its upward trend.

If we focus on the longer-term option, XOM would need to be trading at $93.05 (the strike price plus the long call premium) at expiration in January 2013 in order for the long call on its own to be profitable. Long calls have unlimited profit potential and risk 100% of the premium paid.

For an in-depth look at the pros and cons of diagonal spreads, check out this free webinar I c0-hosted late last year. It – along with many other strategy discussions – is available from our webinar archive.

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