The Dow Jones Industrial Average has surpassed the mighty 14,000 level and looks like it will try to set an all-time high. It last hit that level in October 2007 and it wasn’t able to continue much higher.
The stock for this trade idea has some similarities to the Dow: It had a pretty decent run throughout 2012, and it is starting off the year very bullish and at multi-year highs. The difference is that this stock has been much higher in the past and still has some ground to cover to achieve its all-time highs.
Valero Energy (NYSE: VLO — $44.85): Long Calls
The trade: Buy the March 45 calls for $1.65 or less.
The strategy: Buying a call option is generally used to take advantage of a bullish outlook on the underlying security. The trade can profit if the stock rises, and the call option increases in value as VLO increases in price. Maximum profit is unlimited because VLO can continue to rise, and the maximum loss is $1.65 or whatever was paid if VLO finishes below $45 at March expiration. Breakeven is $46.65 based on a cost of $1.65 at expiration.
The rationale: Valero Energy is one of the largest refineries in the world. Refiner stocks performed well in 2012 and so far in 2013. This past week, VLO became one of the latest refineries to blow away its earnings estimates. Adjusted earnings per share came in at $1.88, which was 70 cents better than consensus estimates, and revenues of $34.7 billion beat estimates by more than $3 billion.
Click to Enlarge Valero expectedly gapped up after it earnings announcement and has continued to trade higher. VLO moved a little lower from the initial gap’s high, but easily surpassed it Friday.
The stock has some previous pivot lows (around $44.50) from about five years ago that it is currently trading just above. This area could act as resistance, so a bullish sign would be if Valero is able to continue to trade above the pivots, which would then become support. This trend might not continue forever, but it looks strong — like the market — for the time being.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.