The massacre in oil prices and energy stocks got me interested in adding a core holding to my portfolio at a deep discount. Rather than go dumpster diving in the small-caps of the space, I decided to stick with the big boys to reduce risk. I could have gone the ETF route with the likes of XLE or XOP, but the dividend yield of Exxon Mobil (currently 8.16%) proved too tempting.

I could have purchased shares outright, but as someone well-versed in the long-term benefits of covered calls and naked puts, it’s hard for me to buy stock and sit on it. So, I have been mixing in more cash flow plays than equity.

My decision-making has been on point over the last few adjustments, so I want to chronicle them to see what we can learn.

Long Stock

On April 20th, we started to see an uptrend emerge, and I wanted to add some shares, hopefully for a longer-term position. So, I purchased stock at $42.62. At the time, I didn’t have any complimentary options positions, so it was a straight stock trade.

Fast forward to June 8th, and XOM had worked its way up to $53.86, gaining 26% in around six weeks. I was pleased that I had bought stock instead of selling puts because it allowed me to participate during the run fully. But, with XOM extremely overbought and forming a doji candle, I decided to exit the stock, selling at $53.86. The plan was to re-enter via naked puts on a pullback.

Naked Puts

Three days later, on June 11th, the stock had pulled back dramatically to $47. I thought it was a sufficient retracement to justify re-entering, this time by selling the July $45 put for $1.57. It was slightly OTM and still had enough premium to make the profit worthwhile if Exxon rallied.

Unfortunately, XOM ended up falling as low as $41.10 but recovered toward $45 last week just in front of expiration. The push lower caused Exxon to fall below its 50-day and 20-day moving average, officially turning the daily trend lower.

On July 15th, with expiration looming and the stock up four days in a downtrend and testing resistance, I decided to exit at 96 cents with a partial profit (61 cents) in tow.

To Roll or Not to Roll?

At this point, I had a choice.

First, immediately sell the Aug put after buying back July. This would re-up the trade for another month, giving the potential for yet more profits if Exxon traded sideways to higher. This is known as rolling out.

Second, wait until the chart showed signs of bullishness before selling the next month’s put. Remember, just because we take profits on one month’s naked put doesn’t mean we have to automatically enter the next.

Thankfully, I decided to wait until XOM at least traded above a prior day’s high. All it’s done since July 15th, though, is decline every single day. It’s down another 2% as I type and is fast approaching its prior support zone.

I’m still waiting for strength before selling another put.

Key Takeaways

Let’s highlight the decisions I’m happy about.

First: I took profits after a massive run-up that begged for a pullback. Sure, Exxon could have kept ripping, but the odds favored a retreat. And it was up 26% in six weeks. That’s a huge gain in such a short period. Here’s another way to think about it. If the original intent was to buy Exxon for its 8% dividend yield, then the stock essentially gave you three years’ worth of dividends in six weeks. Talk about a payday advance!

Second: Flipping from stock to a naked put after its sharp drop was a godsend. I was scared off of rebuying stock due to the aggressiveness of the profit-taking, and the potential reward in the naked put was attractive enough to pull the trigger. I was willing to allow assignment, but when I had the chance to exit at a partial profit just a few days before expiration, I took it. This was due in large part to the fact that XOM was now in a downtrend and I wanted the greater flexibility that using naked puts would provide over long stock.

Third: Not being too quick to sell the next month’s put when a stock is trending lower is a smart tactic. More often than not, you’ll end up being able to sell the same put strike at a better price or go further OTM.

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