by John Kmiecik | September 4, 2012 8:34 am
Hurricane Isaac certainly has been a nuisance. Besides putting human lives in danger, it has shut down many companies — and in this economy, that’s not a good thing.
But sometimes bad news can be good news for a company’s stock. Here is a trade idea on a stock that actually rallied when Isaac made land and threatened to close some of its operations, and still has plenty of potential to rally even more.
The trade: Buy the Valero (NYSE:VLO) October 32 calls for 1.25 or less.
The strategy: A long call is the most fundamental strategy in options. A long call can profit if the stock rises and the call premium increases to an amount more than was paid. Maximum profit is essentially unlimited with a long call because the stock can continue to rise, and the maximum loss is $1.25 if VLO finishes below $32 at October expiration. Breakeven is at $32.25 at expiration based on a cost of $1.25.
The rationale: Valero Energy is the world’s largest independent petroleum refiner. It has multiple refineries from the U.S. West Coast to the Caribbean, so even a hurricane like Isaac could not shut down all of its operations. However, it did close a couple for a short period of time. VLO has a market cap close to $17 billion, and its forward dividend of 70 cents gives it a yield of 2.3%. It’s not the largest yield out there, but it’s also not the smallest.
But this trade idea isn’t based on the strength of the company as much as its stock chart. The stock has been in a solid uptrend, setting higher pivot highs and higher pivot lows since the beginning of June. VLO finally got above a $30 resistance area, which it wasn’t able to accomplish multiple times back in early 2011. This past week, the stock pulled back perfectly, and on Friday a bullish sign was triggered as a previous high was surpassed.
The next resistance area for the stock looks to be around $35 — set way back in 2008 — so this stock has some room to run!
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.
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