VLO Analysis

The petrochemical fuel manufacturer Valero Energy Corp. (VLO), headquartered in San Antonio, Texas, closed above its 20-day price channel on Monday, resulting in a bull signal with low historical odds of success.

[VLO in Wikipedia]

VLO

For the short leg, I shall use the NOV series of options, which trades for the last time 17 days hence, on Nov. 20, and for the long leg, the MAR series, which trades for the last time on March 18, 2016, which is 136 days out.

Odds

The success rate is low but not as low as I would prefer.

VLO has completed seven bull signals in the past year. Three were successful, with a gain on average of 6.3% over 38 days.  The four unsuccessful trades on average lost 7.5% over 12 days.

That gives a 43% success rate.

On the chart, the breakout has driven VLO's price above prior resistance of $66.38 set Oct. 9. The next resistance level is $71.15 set Aug. 13.

Ranges

Implied volatility stands at 33%, which is 2.3 times the VIX, a measure of volatility of the S&P 500 index. VLO’s volatility stands in the 20th percentile of its annual range.

The Trade

I shall structure the trade as a long diagonal spread.

Short the $69 calls,
sold for a credit and expiring Nov. 21.
Probability of expiring out-of-the-money

NOV	Strike	OTM
	69	55.9%

Long the $65 calls,
sold for a credit and expiring March 19.
Probability of expiring in-the-money

MAR	Strike	ITM
	65	55.7%

The short-leg premium is $1.43, and the long leg, $6.58. The stock at the time of entry was priced at $66.62.

Decision for My Account

I'm declining to take this trade. It's not a bad trade, even with the less than optimal success rate., and even with a chart that has scored a break beyond resistance and so may indeed follow through to the upside.

However, given the fact that my account is almost fully committed to trades, I would prefer to leave these funds in cash so I can pursue other opportunities later in the week.

If funds weren't as tight as they are at this point, in the midst of the earnings season, then I would be more likely to take the trade. But as it is, I shall trade VLO based on Monday's bull signal.

-- Tim Bovee, Portland, Oregon, Nov. 3, 2015

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



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Based on a work at www.timbovee.com.