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:
- With last week’s earnings pop VLO stock was able to breach a four month descending trendline (black dotted line in chart).
- The resistance break delivered a higher pivot high officially turning the short-term trend from down to up.
- 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.
- The RSI vaulted above the 50 level for the first time since March. Momentum is officially back in bull territory.
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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.
