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Why Exxon Is a Nearly Perfect Option Trading Candidate

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The stock has a hugely active options series, trades in both monthly and weekly expiration series, and has bid/ask spreads that are just a few pennies wide.

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The logical extension of this daily decay of extrinsic premium has a practical implication every Friday morning. Extrinsic premium that is present for options series expiring that day will go to 0 by the closing bell. Read that again! This weekly occurrence has great profit potential for your trading.

As an example of the power of this mandatory decay, let us consider last week's closing action in the Exxon Mobil (NYSE:XOM) weekly option series. XOM has a hugely active options series, trades in both monthly and weekly expiration series, and has bid/ask spreads that are just a few pennies wide. It is, in short, close to an ideal option trading candidate.

XOM reported earnings shortly before market open on Friday, February 1. The stock initially sold off to $89.40 from its previous close at $90.24. Shortly following this bottom, the stock manifested an intraday rally and the option activity was tightly focused within the first hour of market activity at the 90 strike options, which were set to expire that day.

February 1 XOM Intraday Price Chart



February 1 XOM Option Chain



This strong, clear, and tight focus of options activity was a highly predictive factor that XOM would "pin" the 90 strike for the day.

At the time, XOM was slightly below $90 and the extrinsic premium existing in the 90 strike puts contained an extrinsic value of $0.28 and a total price of $0.32. I sold the 90 puts with only a few hours of life remaining until expiration. Within a few hours, XOM traded to a few cents above $90 and I was able to close these puts for $0.12.

This highly successful trade benefitted from both the resurgence in price correctly predicted earlier by the tightly focused options activity at a single strike price and by the relentless decay in extrinsic premium toward 0 as the expiration bell approached.

Editor's Note: JW Jones offers more content at OptionsTradingSignals.com.

For more on options trading, take a 14 day FREE trial to OptionSmith. Get access to veteran options trader Steve Smith's portfolio along with emailed alerts and strategy with every trade he makes. Learn more.
No positions in stocks mentioned.
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