Exxon (XOM) As a Hedge Play

Assumptions that gas prices will probably continue to rise for some time makes it a good bet to invest in ExxonMobil (NYSE:XOM) as a "gas-pump hedge," according to Michael Schwartz, Oppenheimer & Co.'s chief options strategist.

ExxonMobil, one of America's largest gas-station operators and the world's largest energy company, with operations in 200 countries. At over $82 a share, Exxon is up about 15% this year, and could trade higher in unison with crude, which recently reached about $106 a barrel. The nationwide average price of gasoline is about $3.50 a gallon, and prices are unlikely to decline anytime soon.

Michael Schwartz is advising clients to consider a "gas-pump hedge." It entails buying Exxon's October $85 call and selling the October $95 call, which reduces the trade's price, as Exxon's bullish call options are elevated in widespread anticipation that Exxon will keep climbing. The total position cost $2.86 when the stock was at 82.16. If Exxon's stock advances to 95, investors will make a 250% return on their money. If the stock advances to 87.86, the trade breaks even.

In the past month, six analysts raised Exxon's earnings estimates, a sign of growing recognition that the stock has room to run higher. Oppenheimer recently raised Exxon's 12-to-18-month price target to 96, from 90. To be sure, Exxon's share price is also likely to benefit from continued demand for the Select Sector Energy SPDR (XLE), an exchange-traded fund composed of 41 names. Exxon is XLE's largest component, representing 17.6% of the exchange-traded fund, so trading action in XLE tends to lift Exxon's price.




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