With its recent rally, shares of oil giant Exxon Mobil now yield 2.7%, the lowest since 2014, and just a touch higher than what dating site Match Group pays its shareholders.
Exxon’s dividend has been one of the company’s key selling points with investors, particularly of the retail variety.
So what do you do now if you own shares for income purposes? Turn to options.
Exxon currently presents a compelling case for a “buy-write with a twist” — otherwise known as a covered call spread. This strategy allows investors to collect premium income while retaining a window for capital appreciation, a necessary feature when a stock exhibits the fundamental and technical strength currently seen in XOM.
The macro & fundamental catalyst
Exxon is operating in a sweet spot of capital discipline and favorable market dynamics. With energy demand projected to remain robust, the company’s focus on high-margin production has translated into exceptional free cash flow. From a valuation perspective, XOM remains attractive, with a low EV/EBITDA multiple.
Furthermore, recent upward revisions to earnings estimates indicate that analysts are recognizing the company’s operational efficiency. Over the past five years, Russell 1000 constituents that combined rising earnings estimates with high free cash flow yields delivered significantly better monthly returns, particularly when the technical setup was also good… and it is.
Exxon, 1 year
XOM is trading comfortably above its rising long-term moving average. This price action suggests that dips are being bought and that institutional support remains firm.
The strategy: The enhanced buy-write
Instead of a standard covered call, which caps all upside at the strike price, this strategy utilizes a credit call spread (aka a “short” call spread) overlay on a long stock position:
- Long: 100 shares of XOM
- Sell: June 26th $165 Call (Collect $2.20)
- Buy: June 26th $170 Call (Pay $0.90)
- Net Credit: ~$1.30 per share
- Skill level: Intermediate
Why the “Twist”?
By selling the $165/$170 vertical against the stock, you generate a $1.30 credit, providing a 0.8–1.0% “yield” over the next six weeks. However, the $170 long leg serves as insurance against a massive breakout. If XOM rallies past $170, the investor participates in all gains above that level, effectively “uncapping” the upside that a traditional covered call would have surrendered.
This structure harmonizes perfectly with XOM’s current momentum—providing immediate income while leaving the door open for a significant move higher.
