Should You Follow the Money on Exxon Mobil (XOM)?

It's unwise to conclude too much from big trades, especially on mega-caps like Exxon Mobil (XOM)

Apr 15, 2015 at 8:33 AM
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In honor of David Letterman retiring soon, how about we open up some viewer mail? This, from Monday:

"...[Pundit] just mentioned on Fast Money that XOM traded 50K call options for May 90. That's a reason to buy XOM. GiddyUp.

"Me, I think he's wrong. We have no clue why someone spent a little over a million dollars on the call options. For all I know, someone shorted XOM massively and has call options as a means to stop himself out.

"Moreover, if these far out of the money call options were indicative of something happening, then I would expect XOM to have moved significantly positive relative to COP and CVX.

XOM down 0.26%
COP down 0.29%
CVX down 0.38%

"Effectively, all three are grouped together. There was no flight to XOM.

"The May 90 options have a delta of only 0.1418 or about 15% chance of finishing in the money, using delta as a rough rule of thumb. So the call option buyer needs a quick spike upward to sell his call options at a profit OR needs a significant move during the next few weeks."

I couldn't agree more. I'm a non-believer in chasing order flow in any way, shape, or form, if we're talking about index options. By "index" I mean anything like S&P 500 Index (SPX), SPDR S&P 500 ETF Trust (SPY), PowerShares QQQ Trust (QQQ), Russell 2000 Index (RUT), iShares Russell 2000 ETF (IWM), et. al. As the emailer correctly points out, we just don't know much of anything about the bigger picture of the order initiator. Is he closing calls he wrote? Is he rolling into something else? Is he speculating? Is he running multi-millions or billions, and thus it's not a terribly significant part of his overall portfolio? Is he short the index and hedging? Is he short select stocks and buying calls as insurance?

I could go on and on. The point is that it's dangerous to draw too many conclusions from very limited info. It's probably just as dangerous if we tried to make judgments, even knowing the answers to some of the above questions. I mean, why isn't a big call buy a contra-tell, even if it's a straight opening order with no bigger picture behind it? Unclear.

As for individual stocks, I'm more open to the idea that a big call buyer has some extra info -- and thus, it's potentially smart money that we may want to tail (or at least not oppose). But that's really on a case-by-case basis. If it's a smaller or less active name, and all of a sudden you see calls trade in size on an offer, then watch out above. That's especially true if there's not much open interest in out-of-the-money calls to begin with.

But in this case, we're talking Exxon Mobil Corporation (NYSE:XOM). No one's buying them out, and there's no wonder product in the pipeline that's going to exponentially multiply sales somewhere out in time. It's a gigantic bellwether sort of stock where options trade like water. In other words, it's closer to an index than just a name. And as such, I wouldn't go crazy overanalyzing one big trade.


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