A Short Put Play on Tesoro

by Tyler Craig | June 27, 2012 9:30 am

Despite oil’s widely heralded entrance into bear market territory, not all energy stocks have fallen victim to the bear’s antics. In fact, while oil has continued its slide, some refining stocks have been building notable bases and appear poised to reverse back into uptrends.

In a moment, we’ll highlight one such refining company, but first, let’s take a brief detour through some terminology.

The conventional definition of a bear market is a 20% peak-to-trough decline in an asset’s price. A drop of less than 20% then, would be considered a bull market correction. Since peaking at $110.55 on March 1, crude oil has plummeted to $79.36 — a drop of 28%.

Though reaching the -20% mark holds some psychological significance, keep in mind its selection is somewhat arbitrary. After all, is a 20% drop really that much more bearish than, say, an 18% drop? The answer of course is no.

TSOChartNew 300x192 A Short Put Play on Tesoro
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While oil has been mired in bearish territory, Tesoro (NYSE:TSO[1]) has been building a two-month base that might prove to be a bottom in the stock price for months to come. During the past week, TSO has consolidated at key resistance at $24. A break of this level might portend a further rise in price.

To exploit the anticipated bullish move, traders might consider selling the July 23 put for around 60 cents. By selling the put option, traders obligate themselves to buy 100 shares of TSO if it sits below $23 at July expiration. If TSO remains above $23 as anticipated, the maximum profit potential is limited to the initial $60 credit received at trade entry.

In timing the put sell, traders might consider waiting for TSO to break above $24.40 to confirm the breakout.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

Endnotes:
  1. TSO: http://studio-5.financialcontent.com/investplace/quote?Symbol=TSO

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