In a world where everything related to the oil patch is getting devastated, it’s a rarity to discover an energy stock actually boasting a bullish chart.
But that’s just what we find with Valero Energy Corporation (VLO).
Valero hasn’t just survived the reign of cheap oil, it has actually thrived. While it hasn’t yet reached a new all-time high, it’s certainly close. In 2007, VLO stock climbed to $71.87 before diving into the abyss amid the 2008 commodity crush.
Today it sits at $68, a stone’s throw away from its peak of years past.
Even the recent stock market plunge has been insufficient in toppling VLO stock from its lofty perch. It’s one of the few stocks — energy or otherwise — remaining above a rising 20-day moving average. This week’s pullback is providing an attractive low-risk entry point for those looking to jump aboard.
The action in VLO options has heated up recently. Rising demand has lifted implied volatility to its highest levels of the year — even higher than its last two earnings announcements. At 54%, the IV rank is signaling juicy premiums for those willing to step up and sell options in some fashion.
The VLO Trade
Bull put spreads are the logical choice here. The elevated volatility is providing higher credits resulting in more potential profit. By using out-of-the-money options, we can structure a trade that profits even if the VLO stock price declines moderately from current levels.
Sell the September $62.50/$57.50 put spread for 55 cents. Consider it a bet that VLO stock price remains above $62.50 over the next month.
The max reward is limited to the initial 55 cents credit and will be pocketed if both puts expire out-of-the-money.
The max risk is limited to the distance between strike prices minus the net credit, or $4.45, and will be lost if VLO stock falls below $57.50 by expiration.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
