Put Selling And Spread Strategies For Exxon Stock

Four Option Strategies For Exxon Mobil Stock

Recently I had a friend ask me how I would set up a naked put strategy for eventually owning shares in EXXON MOBILE CORP. This is an excellent company to consider for a long term naked put, covered call portfolio.

This article while related to XOM, shows that these strategies could be applied to a number of stock positions, in order to determine the price point where an individual investor would want to own stock. It is important when using these strategies to decide at what price point to enter the stock. To determine this an investor needs to look at past performance, chart patterns, earnings both future and past and determine the price point they believe is of interest to them.

First a little information about this giant corporation: Exxon Mobil Corporation (XOM) is a manufacturer and marketer of commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a range of specialty products. It also has interests in electric power generation facilities. The Company has several divisions and hundreds of affiliates with names that include ExxonMobil, Exxon, Esso or Mobil. Divisions and affiliated companies of ExxonMobil operate or market products in the United States and other countries of the world. Their principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacture of petroleum products and transportation and sale of crude oil, natural gas and petroleum products. At December 31, 2009, approximately 7.5 billion oil-equivalent barrels (GOEB) of the Company's reserves were classified as proved undeveloped, which represented 33% of the 23 GOEB reported in proved reserves.

We can see that this corporation has good earnings and good prospects for future earnings. Let's look at the past few years and we can see that the stock traded from $54 to a high over $90. This is quite a range on this stock. During the credit crisis of 2008 and early 2009 the stock retested those lows and held. The yellow highlight shows the $60 strike price valuation and it appears to have strong support at those levels. The 65 strike is in pink and shows that $65 is more median for the stock since Mar 2009. For two of the strategies below I will use $65.00 as my pivot point.
 

XOM Strategy

The parameters of the trade are to eventually own 400 shares and invest no more than $26,000.00. Before getting into the stock, my friend would like to make some additional premium to reduce his overall cost for this stock. He would like to use other people's money to assist in buying the stock. At the time of writing this article, Mar 4 2010 the stock is at $66.37. There are a number of strategies an investor who likes naked puts could consider implementing. Here are a few of the strategies I developed based on past performance, and the requirement of $26,000. Remember though that by my not buying the stock outright and selling covered calls, I am possibly foregoing any move higher in the stock by starting with naked puts first. This is the risk taken when using naked puts to generate income before actually owning shares.

Strategy Number 1: Bias Neutral to Bullish (no commissions taken into account)

Concept: The ultimate goal is to end up owning possibly 400 shares but to use other people's money through naked puts, to generate some income before being assigned. To accomplish this I like to establish a pivot point. This is basically the point where I am going to be happy to be assigned. While there are no guarantees in investing (just like in life), I am relying on the past performance, past and future earnings, and the overall strength in the stock which is at around the $60 to $65 strike range. Therefore I will be happy if I am assigned at $65, which during the past year has been our median range based on the lows during the credit crisis and a high just over $70 in the past year. Oil has ranged from a low of around $34.00 to a high of just over $81 during the past 18 months (Oct 2008 - March 2010). However XOM is not just an oil play (as you can tell from the write up at the top of this page) which is part of the reason it would be a good stock to own.
In the chart below you can see the trades I would do for strategy number 1 - commencing Mar 5 2010.

Strategy Number 1 - Comments

One of the important aspects of this trade is the opportunity to roll all positions in the future, to garner more premium before accepting assignment. Our leap put is the pivot point at $65.00. It already provides us with an 8% return and provides some protection in the event that the stock falls below $60.00, which as you recall is the low point where there appears to be fairly solid support. Based on the past performance for 18 months, the opportunity to be able to roll these naked put positions is around 75%. In this trade strategy I am holding 1 leap put at $65.00, 1 short put at Jul $60 and then split the $65.00 put into 2 more positions; one at Apr $65 for $1.00 and another at Jul $65 for $2.77. This brings in immediately $1023.00 in premium and should I be assigned on all positions, I will be in the stock at $62.44.
Here is my strategy:

A) The leap put is our pivot point at $65.00. That's where I want to be assigned. If the stock is not there as the expiration approaches, perhaps by November, I will buy to close and roll this out for another year.

 
B) The second put is my AT THE MONEY (ATM) which will be rolled constantly to the closest month. It may at many times garner the highest short term premium. This put strike may change frequently. I may find that I have to roll this put higher up if the stock moves higher. Should the stock move to $70.00, I will sell a $70.00 put. It will be the most volatile and I will roll it continuously and monitor it closely. Even if there is only .10 cents to be had by rolling it forward a month or two, as it nears expiration I will roll this put. The reason is simple. If I do not roll the put I may find myself stuck being assigned at $70, $75 or $80 dollars as the stock moves up. That will alter my overall stock entry value. But I can tell from the chart that if I stay on top of this put, I can roll it and eventually the stock should come back down. I may though have to reconsider my valuation of an entry around $65.00 if events change. Events happen that are beyond my control such as oil doubles in price, or the company makes an acquisition which increases its value. Events like these are unforeseen and will require a re-evaluation of my strategy. How to know when to roll? Become disciplined: At any strike above $65.00 should I have sold, I must be prepared to buy the strike back if the premiums I received increases by more than 50%. For example I received $1.00 for a $70.00 put and the stock begins to fall, as soon as the premium increases to $1.50, I buy to close the put. Then wait for the stock to stabilize and sell the closest put again, at the money. This is the put that I will buy to close more often. For example I have sold the April 65 put. If the value falls to .20 cents or less I will buy to close rather than wait for expiration. The reason is simple - it is the most volatile put and stocks can fall and rise quickly. If the trade is in my favor to close early, I will do so.

C) The third put is always out of the money I will not sell puts any higher than my long pivot point. That means should the stock move to 75 or 80 dollars, and there is no premium left for 65 or lower, then I will not sell this put, but instead move to a new stock until XOM pulls back into my range. I could however look beyond 5 or 6 months and should the stock move back to 70 or 80 dollars, and this put expire, I could consider selling a second leap, at 65 or lower, but farther out at possibly 2012.

D) The last put is my semi-annual pivot put. $65.00. I will roll this as needed and stay as close as possible to the pivot point strike, but go longer out, 5 to 6 months. Again, if the semi-annual pivot decreases to .20 cents or less I will buy it back and sell further out.

The overall strategy to to eventually own 400 shares of stock but strive to use naked puts to garner income to reduce the amount of my own money I am using to eventually own 400 shares. At the same time however, should the stock take off, making all the puts worthless, I can take solace that my leap put earned 8% for me. I would hold it until .10 cents or less and I might consider selling another put at 2012 as long as I can earn at least 8% /annual return for holding another leap put. There is no point in chasing the stock unless the fundamentals of the company have changed and there is reason to believe that at $80.00, the stock is worth the same to me as it was at $65.00.

Strategy Number 2: Bias towards bullish (no commissions taken into account)

Concept: I suggest you read strategy 1 to understand strategy 2 as I am not going to repeat concepts from strategy 1. This is a different take on strategy 1.
The main difference here is to decide whether or not I would like to participate in any possible move higher in the stock price. Over a period of a year this stock has a very good chance that it will move above 70.00 and could even possibly stay there. If I am selling puts from strategy 1, the chance that I could "miss out" on a move higher by the stock is quite possible and I might even say probable. This strategy takes that into account.

Strategy Number 2 - Comments

The whole purpose of this strategy is the participate in any move up in the stock while still providing some level of protection. The $70.00 leap is sold rather than the $65.00. Our pivot point remains $65.00, but the level of protection from the pivot point is less. However on assignment, the overall share valuation after income is only higher by about $1.00 or $400.00. Our pivot point now moves from the leap to the ATM Apr $65 put. Aside from this the OTM put remains 5 to 6 months out and below the pivot point. Should the stock move higher, and I be unable or unwilling to sell naked puts above my $65.00 pivot, I can let the options expire and still participate in the move higher. On the other hand, should the stock not reach $70.00 I may have an opportunity to roll my puts. Based on the past performance for 18 months, the opportunity to be able to roll these naked put positions is around 60%. I could easily change the leap put and move to the $75.00, if I felt there was a better than 50% chance that the stock would move that high over the next 9 months.
POSSIBLE LEG: If I was more bullish on XOM, I could take some of the premium earned and purchase 1 call contract 5 months out. The July 75 is trading at .44 cents as of Mar 5 2010 and this would be an inexpensive way to garner some income should the stock move higher. It is cheap insurance on any move higher and the stock has been as high as 76 in the last 12 months. For me I believe the 70.00 leap put is my insurance that I can participate in any rally higher.
PROTECTION: As these are all naked puts which means the risk to the downside is unprotected, we could add a monthly catastrophe insurance by buying cheap OTM puts. The April $55 put is trading for .08 cents. With the above strategy I could add cheap insurance in the event of a plunge by looking at monthly far OTM puts, sort of like "Term Insurance".

Strategy Number 3: Bias towards caution. (no commissions taken into account)

Concept: I suggest you read strategy 1 and 2 to understand strategy 3 as I am not going to repeat concepts from the previous strategies.
The main difference here is to decide whether or not I think caution is advised. If I was cautious to slightly bearish, I might decide to put in place this strategy. I should mention that if I was completely bearish I would not get into this stock but purchase puts instead.

Strategy Number 3 - Comments

The whole purpose of this strategy is caution. Looking at the 3 year chart on this stock, the chance of the stock being at $60.00 one year out is less than 50%. This makes the leap strike at $60 a nice pivot point and a better than 50% chance it will expire worthless and you will be able to roll this to the next year. The second leap put at $55.00 sits at the 3 year low point on the stock. The chance of this put expiring worthless and being able to roll this put is 90%. As I am more cautious here, my pivot point is $60.00. Should the stock move higher but I am unwilling or unable to sell naked puts higher than $65.00, I can close out the ATM naked puts (let them expire worthless) and hold the leaps until they reach .10 cents or less and close them. I know that I have garnered a return much better than money market rates, even though I did not own any stock in XOM.
 
ADJUSTMENT TO CONSIDER: I could consider keeping the remaining two contracts together. Perhaps selling the Apr 65 and move these two contracts as the stock moves. This will require constant monitoring and I will buy them back should I have to sell puts at $70.00 or higher. To buy back, I will follow the strategy I outlined in strategy number 1. The whole need now will be to use the ATM puts to try to generate as much as possible in income as the rest of my capital is tied up with the two leap puts.

Strategy Number 4: Bias Bullish - I Like The Stock, Period - Go For The Bull Call Spread (no commissions taken into account)

This is the actual trade I have decided to do, after investigating this stock. Concept: I suggest you read strategy 1, 2 and 3 above to understand strategy 4 as I am not going to repeat information from the previous strategies.
In this strategy I am bullish on XOM. I want to participate in any rally, use only a portion of my $26,000 and use deep in the money (ITM) Call options to replace the stock for 1 year.

Strategy Number 4 - Comments

I have $26,000 but would like to secure myself a spot in this stock today. Yet if I use my entire $26,000 immediately I may miss out on opportunities with other stocks. Some stock though, just lend themselves to a spread. In the case of XOM I decide at today's price (Mar 5 2010) the stock is a great entry price. Looking at the stock chart for the past 3 years at the top of this page, it seems to me that I have a very good chance that this stock is sitting close to support. Therefore why buy it now, when I can buy deep in the money call options with a delta of 1.0, meaning that the call option is valued almost identical to the stock. I then sell 4 calls for Jul $70.00. If it reaches there and I am exercised, I can exercise my $45.00 calls and my profit on the $8680.00 that I spent is 23%. If it doesn't reach $70.00 by July, I can write another call option for October or even Jan 2011, thereby reducing my cost in this stock and then deciding by January 2011 whether or not I want to exercise at $45.00 and place the rest of my money into the stock. Meanwhile my remaining balance of $26,000 less $8680.00 + 692.00 = $18,012.00 can be used for other trades that will come my way. I am at risk for $7988.00 on this stock and nothing more.

ADJUSTMENT TO CONSIDER: There are many adjustments I can consider for this stock. One would be to go out to Jan 2012 $45.00 call. The Jan 2012 $45.00 call is trading (Mar 5 2010) at this time at $22.00 which puts me in the stock at $66.90 (The stock price right now is $66.37). This would give me perhaps 4 or 5 opportunities to sell the $70.00 call to reduce my cost basis and should the stock close at or above $70.00 by expiration, I will make a profit. The difference between the Jan 2011 and Jan 2012 $45.00 strike at the time of writing this is a mere .30 cents, but I have a whole year longer for the trade to work out. Meanwhile my remaining balance is busy earning me money in other positions, for almost two years at which time I will then need to free it up should I wish to put myself into this stock by exercising my call options at $45.00, all the while I know exactly what my risk of loss is on this stock. If it went to zero I am out $7988.00 and this amount will decrease with every call option I place.

OTHER POINTS TO PONDER: What if I want to leg into this stock over a period of two years and just try to pick it up every time it bottoms out? I could just buy 1 deep in the money 2 year leap call, each time it pulls back and sell a leap call against it. That way over a period of 2 years I could work my way into the stock, while at the same time earning money from the calls. If the stock rallies and takes out my out of the money call that I sold, then I have made a profit.

How about if I don't have $26,000 now just $7,000, but I know in the future I will have $19,000 more available for this position. This would make a great trade. If for example I know that by January 2012 I will have $19,000 available and I want to be in XOM before then as I believe oil prices will move up and this stock could go back to the mid to high $70's. I could buy 3 or 4 deep in the money, 2 year leap calls and I could sell 2 year leap out of the money calls against those.
For example:

FINAL POINTS TO PONDER: What if I was a little worried and thought to myself, "2 years is a long time". How can I protect myself? If I sold the Jan 2012 $70.00 calls I could consider buying some short term puts. For example, as of Mar 5 2010 a July 50 put is .26 cents. The April 50 put is just .05 cents. If I could buy this cheap protection for the next 22 months, it would cost me .05 X 22 = $1.10 per share X 400 = $440.00. The interesting thing about this cheap insurance is that if the stock works in my favor, and moves higher, I can move my put price higher, following the stock's move up. For example, if the stock goes to $70.00, I should be able to buy the $55.00 put for .05 cents. If the stock goes to $75.00 I should be able to buy the $60.00 put for .05 cents. If the stock pulls back, my put will grow in value helping to offset my cost in the stock even further.

LAST POINT TO PONDER: Last, I could consider spending less on the leap call purchased, by moving higher. This means that the capital I have at risk would be less, and the return on my investment is higher should the trade work to my favor. For example:

This strategy could be played out into 2012 by my possibly buying the Jan 2012 60.00 call and selling the Jan 2012 $75.00 call. I just have to remember what my cost in the stock is and then make sure I am selling the out of the money calls at a strike that does not lock me into a loss position. I could also consider still buying cheap monthly puts if the stock moves higher. I could also consider buying back the calls I sold and move higher, if the stock moves higher. If the stock moves back up to the $80.00 or higher range, the $70.00 puts will be around .05 cents and I could wait and buy puts then.

SUMMARY: The combinations on this stock are endless, partly because the chart pattern is very good and the option pricing is reasonable both to purchase the calls and to sell the calls, making the spread a very viable choice and certainly a spread that offers great control of risk allowing me to sleep nights. Remember though that there is still risk. Should the stock experience a decline, my break even points can easily be breached thereby placing me in a loss position. While there are a number of remedies I can try including just closing both sides as quickly as possible, there is still risk of loss. Nothing you read is to be considered recommendations or advice. Trade at your own risk. Investing can and does result in large losses.

BONUS Strategy: Neutral To Bullish - Use A Bull Put Spread

I had contemplated this idea but set it aside as not being able to generate enough income to warrant the time spent to monitor the trade as I felt the best bull put spread was selling the $60 and buying the $55.00. However as I only have $26,000 to eventually invest, I felt the above 4 strategies were better than a bull put spread. I was contacted by an investor who after reviewing my 4 strategies, wondered about using a bull put spread. (You can read his email to me here and my reply follows) He had looked at selling the July 60 Put @ 1.23 and buying the July 55 put @ .60. But based on 26,000.00, an investor could only consider 4 contracts, so the gain on the trade would be just $252.00 for a little more than 4 months. If this could be repeated over a 12 month period an investor could possibly earn 756.00 or a return of 2.9% on the 26,000. Instead if I was going to consider a bull put spread I would only go out 2 months and consider the trade below. If this trade could be done 6 times during the year it could possibly generate 1800.00 or 6.9% annual based on capital of $26,000.

I still consider this too low a return to consider but it is better than money market rates. Part of the problem is XOM has low volatility and trades in $5.00 strikes and I believe premiums do not warrant the time required to monitor and consider adjustments for a bull put spread on this type of stock. I have found that in most cases bull put spreads generate better returns on stocks that are at or below $25.00 and trade in $1.00 strike increments.

COMMENTS, QUESTIONS AND IDEAS FROM READERS:

A question from a reader prompted me to include the Bull Put Spread: Here is his question and my answer:
"Since there was such a thorough and interesting (great read) analysis on this stock buy, why not completely hedge this entry by running a BULL PUT (CREDIT) SPREAD - - which is a very common and easy-to-understand approach to acquiring XOM over the long run but running these 45 days out with the first strike below your pivot but with good premium.....

In other words, why OWN XOM but rather just run a series of Credit Spreads for income and watch the price action over time and possibly, maybe even likely, acquire XOM at a lower pivot price?

For example:
1. STO July $60 Put for a credit of $1.23, 5 contracts
2. BTO July $55 Put for a debit of $.60, 5 contracts

Net credit of around $.55 to %.63 depending on how it opens today. If XOM pulls back to $60, this is well below your pivot, there is time, and theta on your side to make this play.

There may be a pull-back. There is some support at $63 and then again at $61. I am seeing a bit of a wave down pattern on the chart, starting in the Thanksgiving 2009 timeframe. The 52 week low is in the high $61 area...this would be my target price action area and thus a pull-back would be very beneficial, esp with a series of credits for a buy-in.

The spread is run for those investors who want to reduce margin exposure....smaller accounts would benefit. You could open more contracts, say 10 to 15 of them with credit spreads versus non-secured margin type accounts.

The market is getting overbought. There is indeed a disconnect with Oil and XOM....Oil will top out eventually but in any event, XOM is not a great tie-in to oil Price Action.

You have gotten me interested in this play and my email above is not a suggestion but rather an indication of how I might play this stock.
This strategy would build a credit against this stock over time using other people's money and the acquisition would be had by year end, 2010 or a year from now. I would like to see some behavior and get very familiar with this stock's Price Action and momentum patterns.
Let me know that you think."

My Answer:

The bull put spread is something I did consider.
A couple of things deterred me though. My friend wanted to own 400 shares of stock and put at risk no more than 26,000.00. Risk is something that I take very much to heart. Even the very best trade can turn into a loss when investors least expect it. I looked at the chart and felt that anywhere below $60.00 is fair valuation of XOM. Therefore, I built my strategies based on getting into the stock at a pivot point of $65 or $60 and trying to generate enough income to warrant setting up the trades and monitoring them. Therefore doing more than 4 contracts would require margin and getting into 10 or 15 contracts would put at risk far more capital than my friend originally intended.
Bull put spreads work very well on stocks that have good monthly premiums, whereas XOM with its lower volatility, has poor monthly premiums for a bull put spread. I looked at the same months as you but going out to July brought in just $315.00 for 5 contracts (before commission) and meant going out almost 5 months. I felt that the time spent to monitor and consider possible adjustments did not warrant $315.00 in income while holding 26,000 in capital. Instead I looked at the April 65 and 60 puts which could generate 300.00 on a bull put spread of 4 contracts, which keeps it in his 26,000 capital range.

If this trade could be rolled for a period of a year, while monitoring the direction of the stock, then he could generate possibly 6% or so on his capital. While not huge, it still is better than money market rates and it might guarantee him getting into XOM at a lower level. However, should the stock move higher, he would be writing a bull put spread at levels that I would not want to write at.

Bull put spreads work very well on stocks that have more volatility than XOM, and if possible, have strike positions at $1.00 or $2.50 increments, rather than $5.00 increments. With a $5.00 increment the risk of course is higher on stocks like XOM, whereas a stock like RIMM has better premiums as it is more volatile, but the bull put spread still puts at risk a smaller amount of capital should the trade go against the investor.

I have never had a lot of luck with bull put spreads on stocks like XOM or RIMM for that matter. I have had great success with stocks like MSFT as they trade in $1.00 increments often putting less of my capital at risk. Being lower priced as well, means I can put in place large volume of contracts but with the same amount of capital. 4 contracts in XOM versus 900 in MSFT.

Nonetheless I think a bull put spread could be considered and I have added it to the XOM examples as a bonus strategy. While I wouldn’t recommend it for this investor, it is another example of how an investor could put in place an option trade to leg into a stock. I would agree that a bull put spread could end up putting the investor into the stock at a lower price point, if the stock is on a decline. But normally if the stock is in a decline I would never consider a bull put spread, but instead go with the bear call spread. Again though the premiums on the calls for XOM do not warrant considering a bear call spread.

Overall I prefer Strategy Number 4 of how I used the bull call spread to consider entering the stock, hedging myself with some cheap puts and selling naked puts to try to generate more income to reduce my overall entry point. I felt that by selling naked puts on top of the bull call spread, should the stock move lower, I can close and move lower with my naked puts, working my way lower into the stock. I felt that XOM has a decent chart and overall I feel it is a stock my friend could be in for years if he wanted to set up a covered call, naked put program.

Also I have to disagree when you indicate that the bull put spread hedges this trade completely. It does cap the downside better than a naked put because of the purchased put. However the maximum loss with a bull put spread is greater than the maximum gain, despite the capped downside protection. As well should the stock rise, the upside is capped completely. You can buy and close the trade, but this still cuts into any profit. Finally, bull put spreads, just like naked puts, do not guarantee the investor he will get into the stock at a price he is comfortable with.

Question and Suggestion For Protective Puts:

Another Question From A Reader: I am mulling your option strategies on XOM. 
In your comments about protection you said. "As these are all naked puts which means the risk to the downside is unprotected, we could add a monthly catastrophe insurance by buying cheap OTM puts. The April $55 put is trading for .08 cents. With the above strategy I could add cheap insurance in the event of a plunge by looking at monthly far OTM puts, sort of like "Term Insurance"".

Just another suggestion on protective puts. Buying the March 65 puts for .15 buys you a lot more protection if the stock dives. Each month place a GTC (GOOD TILL CANCELLED) order to buy ATM (at the money) puts at .15. Its kind of fun to place long term orders that if filled are great and don't cost anything to have out there. I call it fishing and with the crazy trading these do get filled more times than not. This is throw away money, just like our personal insurance costs and most months you will lose your cost. If no fill, no loss either. One of these months and we don't know when it will happen but we know it will happen, those cheap puts could be a huge windfall and pay for all the months you may have been paying for this insurance so your cost will be zero for very good protection. You have a Jan11 65 put so why not sell a Jan11 80 call for 1.00 to use as money to pay for the .15 puts. Just another option.

My Answer:

These are excellent suggestions and I will look into incorporating them in the future. The only problem I have ever had with fishing was that when I really needed the puts, I always found my fishing hadn’t caught the fish so it cost far more to buy the fish at market prices, when I could have got them for next to nothing when no one else wanted to eat fish. You can tell that I love your fishing example.
The fish market example is a good one. I can see the value of just fishing for .15 cents on an ATM put. However you are assuming that you will possibly get filled for the ATM put. The fill will come if the stock moves higher, but should the stock move lower, I will end up paying a lot more for the protective put. Therefore I assume that each month I can buy catastrophe insurance for less than .10 cents. I would rather spend the money upfront, rather than find out that suddenly I am paying a lot more for what the insurance would have cost, basically wiping out months of just paying .10 cents or less. It is sort of like having a term life policy but not really paying for it. You have your "term life quote" in hand and you just keep fishing for a better quote. Then suddenly you are diagnosed with cancer or such and your premium skyrockets. That's why I labeled it catastrophe insurance. It's only for a catastrophic (life threatening) event. As to the 80 call (or basically any far OTM call), I love the idea and will look to incorporate it.

ADDENDUM TO THE ABOVE QUESTION:

For many investors it may make sense to consider selling monthly far out of the money naked calls to assist in reducing the cost of the protective put, rather than my Jan 2011 55 put. For example as of Mar 10 2010, the April 70 call is trading for .46 BID. I could short just 2 Apr 70 calls and that would pay for 10 Apr 55 put contracts at .08 cents. Meanwhile should XOM move to $70.00 I could purchase 200 shares and turn it into a covered call (similar to my trades on RIM which can be seen here). That reduces the amount of capital I require for this stock and by selling the $70.00 call it is exactly what I would like the stock to do - move up. I could monitor the stock monthly and consider my strike points with each month. Right now though for my own trade, I like the 5 naked puts Jan 2011 $55.00 as I wouldn't mind being assigned at $55 and if not, they will have paid for my catastrophe insurance.

REMEMBER THAT NAKED CALLS ARE AS RISKY AS NAKED PUTS, and perhaps more so. With a naked put your risk is zero, while with naked calls the risk is endless if the stock just keeps rising. I have never been concerned about either naked puts or calls. With naked calls, the stock is doing something you want it to do, move up. For me, when the stock moves up I buy the required number of shares and turn the trade into a covered call position. Remember that investing can result in large losses. Nothing on my website is financial advice or recommendations. Trade at your own risk.

ANOTHER READER QUESTION AND SUGGESTION:

I enjoy your articles on the mailing list and am a frequent visitor to your site. I recently read your interesting analysis on the XOM trade. I want to know if this strategy is covered and/your thoughts on it -sell July 2010 65 put for $2.45 and purchase short term 60 or 65 puts on the cheap for protection every month i.e. a short calendar trade. Hopefully and if I time this correctly, I can do this 4 month calendar for a credit. Thanks,PR

MY ANSWER:

You are presenting a bull put spread. Sell the higher put for premium and buy the lower put for protection. This is an intermediate strategy that can be profitable for stocks that are either range bound or rising. In the end there are literally dozens of option strategies that can be used. It all comes down to your goal and objective. If you lay out your goal and objective then you have the confidence to get into your trade. Without this, you are going to continue to make adjustments constantly and eventually the trade may very well end up either losing you capital, or not reaching the return you had expected. If the goal is to garner some income and the objective is to eventually be assigned. If on the other hand the goal is to garner some income, not be assigned or the goal is to garner some income and to protect the naked put. Or perhaps the goal is income and the objective is a combination of all three.

I looked at a variety of trade possibilities when I was contacted by my friend who would like to own 400 shares of XOM. The problem with a number of strategies is that they take advantage of short term trades but do not take into account a rise in the price of the stock. If indeed XOM is at a low point and may work its way back up, then the investor will want to be able to capture some of the stock gain. Many of the other strategies, including yours could be profitable, but if the stock works its way higher, the profit is limited by the bull put spread. While adjustments can be made to the bull put spread or even your other horizontal spread, the profit picture is limited more than through a bull call spread or even strategy 2 which sells a deep in the money put. Overall your strategies are designed for sideways to lower for this stock. That may very well be the case, but if income alone is all your goal is and the objective is to not own the stock, there are better stocks to apply your strategy to, that will garner more income. I would concentrate more on stocks with put strikes of $1 increments and stocks trading below $20 or $25.00.