Valero Energy Corporation: VLO Stock Is on the Mend, Buy Calls

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Thanks to some earnings magic Valero Energy Corporation (NYSE:VLO) is making a comeback. Last Tuesday the Texas-based oil and gas company reported better-than-expected earnings of $1.07 per share. Analysts were expecting $1.01, so consider it a healthy beat. Traders rewarded Valero with handsome gains turning its trend in the process.

While VLO has much work to be done before reversing its long-term downtrend, things are looking up in the short run. To wit:

  1. With last week’s earnings pop VLO stock was able to breach a four month descending trendline (black dotted line in chart).
  2. The resistance break delivered a higher pivot high officially turning the short-term trend from down to up.
  3. Volume patterns accompanying the reversal have been bullish. The surge was accompanied by high volume while the slight pullback heading into the weekend was on light volume.
  4. The RSI vaulted above the 50 level for the first time since March. Momentum is officially back in bull territory.
VLO (2)
Click to Enlarge
Source: OptionsAnalytix

The three day dip in Valero stock is providing spectators with a lower risk entry.

The Valero Stock Trade

As is customary, demand for VLO options has ebbed post-earnings and that means derivatives are on sale. The implied volatility rank for Valero sits at a lowly 13%. Though, to be fair, volatility is low pretty much everywhere you look these days. Nonetheless, I like long option plays on VLO here.

Aggressive traders could buy the Sep $50 calls for around $3.10. The risk is limited to the initial debit and will be lost if the stock sits below $50 at expiration. The reward is unlimited. The market is sputtering a bit this morning so consider waiting until VLO takes out $52.50 before pulling the trigger.

Conservative traders could buy the $50/$55 call spread for around $2.36. This is a bull call spread consisting of buying to open the Sep $50 call while selling to open the Sep $55 call. The risk is capped at the initial $2.36 and will be lost if VLO sits below $50 at expiration. The reward is $2.64 and will be captured if the stock can rise above $55 by expiration.

At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/08/valero-stock-is-on-the-mend-buy-calls/.

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