Burgeoning Exxon about to Pop

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Though a rising bull market tide tends to lift all boats, it doesn’t lift them all to the same degree, nor at the same time. Money flows in and out of different sectors as some stocks become the champions of the market while others fall out of favor. Yet in a rising market, these deadbeat stocks don’t typically fall far before becoming darlings once again.

Take the recent action in the energy space, for instance. While energy largely lagged the market in recent weeks and was one of the only sectors to fall beneath its 50-day moving average, it was leading the market higher throughout Monday’s trading session as money returned to this once-beleaguered sector. Though energy names have been shunned in recent days, they weren’t altogether forgotten by the benevolent bull.
Daily chart of Exxon Mobil (XOM)
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If energy names continue to come back in favor, traders might consider taking a renewed look for opportunities within the space.  Exxon Mobil Corp. (NYSE:XOM) is one such energy sector component that appears poised to break out above a key multi-year resistance zone at the $88 level.

To exploit the expected move, traders might consider purchasing a May 85-90 bull call spread by buying to open the 85 call and selling to open the 90 call for a net debit of $2.70 (or better). The maximum risk would be limited to the initial $270 ($2.70 x 100) premium paid while the max reward would be limited to the distance between strikes minus the net debit, or $230 (5 – 2.70).

Maximum profit is achieved if XOM is trading above the 90 strike when the options expire. Above this level, both calls are in-the-money and the profit is the difference between these intrinsic values (a spread of $5, no matter where the stock is trading) less the $2.70 debit.

The maximum loss of $2.70 occurs if XOM is trading anywhere below the 85 strike. Breakeven for this spread is $87.70, or the long call strike plus the premium paid.

At the time of this writing, Tyler Craig had no positions in XOM.

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Article printed from InvestorPlace Media, https://investorplace.com/2012/04/burgeoning-exxon-about-to-pop/.

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