Tesoro: A More Refined Way to Play Oil (TSO)

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With oil prices projected to remain low for an extended period due to oversupply concerns and tepid economic growth, gasoline refiners like Tesoro (TSO) should reap the benefit of cheaper crude.

Crack spreadLower operating costs and higher margins will likely be felt with oil prices mired below $40 per barrel, which will translate to higher revenues and earnings for TSO.

Crack spreads, which are an indicator of refining margins, have been moving higher and remain firmly in positive territory, a very good development for TSO stock.

Unlike major oil producers such as ExxonMobil (XOM) and Chevron (CVX), independent oil refiners like Tesoro aren’t directly correlated to the price of oil. Instead, TSO should continue to reap the benefits of a lower oil pricing regime with crack spreads likely to remain robust for an extended period.

Tesoro Stock Charts

Tesoro also looks attractive from a technical standpoint, with TSO putting in a big reversal yesterday. TSO stock traded below the critical $99 support level mid-morning, only to turn and head higher, closing near the intraday high at $101.83.

This type of price action is many times indicative of an intermediate-term bottom, and support in TSO did hold firm.

tesoro-tso-stock

In other bullish developments, the 9-day RSI, at 28.93, is below the oversold level of 30, which in the past has been a prescient gauge of an impending rally in Tesoro stock.

tesoro-stock

With a dividend yield approaching 2% and a P/E ratio below 8, TSO is also attractive from a fundamental basis. A solid balance sheet along with robust free cash flow and a billion dollar stock buyback should lend additional support to TSO stock at these levels.

Tesoro is down 16% in just the past three weeks from its recent high of $119.67 on Nov. 24, with implied volatility having spiked higher as well. This combination of a sharp selloff and heightened anxiety in option prices is usually a reliable indicator that the selling may be overdone.

Implied volatility at recent highs makes option selling strategies a favored method to take a bullish stance in Tesoro. Major support on TSO is at $99, with additional support at the $94 level.

I would look to structure a put credit spread just below the $94 secondary support level by selling the TSO Jan $92.50 puts and buying the TSO Jan $90 puts for a 50 cents net credit. The $92.50 strike is 9.16% below the TSO closing price of $101.83.

The maximum risk on the trade is $200 per spread, with a maximum gain of $50 per spread. Return on risk is 25%. I would look to close out the position if TSO trades meaningfully below the $94 support level. Otherwise, let the spread expire worthless and look to keep the initial 50-cent credit.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.

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Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


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