Options Update: Valero Energy Puts Popular Despite Strong Crude Prices

Other than the constantly fluctuating price of crude oil, there has been little news on Valero Energy
Quote |
Chart |
News |
recently. The company announced last week that downed fluid catalytic crackers at its refineries in St. Charles, Louisiana, and Corpus Christi, Texas, will be out indefinitely. That said, this old news is hardly groundbreaking enough to spark today’s influx of put option volume on the shares.

So far today, VLO has moved about 2.5% higher following a return to the $50-per-barrel region by crude oil. Given the heavy put volume taking place on the shares today, however, it seems that options traders are betting heavily that this strength in energy prices won’t last. More than 7,900 VLO puts have changed hands today, more than doubling the stock’s average daily put volume. Furthermore, this spike in volume has placed the shares on our Intraday Volume Explosion List. However, it was the more than 2,000 contracts that traded at VLO’s January 2009 26 strike that caught my eye today.

Valero Energy option volume details

The Anatomy of a Valero Energy Put Position

Diving into the options data, I noticed that the majority of today’s volume has traded at the ask price. Combine this activity with the fact that today’s volume at the January 26 put has exceeded open interest at this strike, and VLO could be the target of buy-to-open put positions. As such, I will be running with a put-buying theme this afternoon.

Specifically, a block of 91 January 2009 26 VLO puts traded at the ask price of $1.28 at 9:51 a.m. Eastern time. The total outlay for this position would be $11,648 — ($1.28 * 100)*91 = $11,648. For this trade to reach breakeven, VLO would need to fall about 1.5% to $24.72 per share from the stock’s current trading range before the options expire on Jan. 16. The maximum loss on this position is limited to the initial investment of $11,648.

By entering this trade, the investor is indicating that he expects VLO to steadily decline during the next several sessions. The shares may be up in today’s trading, but overhead resistance in the 26 region is holding firm. Let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.

Getting Technical

The stock’s technical backdrop appears very supportive for a January 2009 26 put position. VLO has fallen more than 61% during the past 52 weeks, pressured steadily lower by its falling 10-week and 20-week moving averages. The equity has recently moved above this repressive duo, but technical resistance at the 26 level looms large overhead. VLO has not closed a week above this region since late September. Another rejection at this technical hurdle could signal that selling pressure has yet to be fully exhausted, pointing toward a continued decline in the shares.

Weekly chart of Valero Energy since October 2007 with 10-week and 20-week moving averages

The Sentiment Drivers

VLO’s sentiment backdrop also points toward continued losses for the shares. Options traders continue to expect a rebound despite the poor technical performance, as the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.42 ranks below 74% of all those taken during the past year. Meanwhile, VLO has garnered 5 “buys,” 7 “holds,” and no “sells” from the analyst community, leaving plenty of room for potential downgrades on the shares. Even short sellers are shunning this underperforming equity, as less than 3% of VLO’s float has been sold short. Should we see these bulls begin to capitulate to the stock’s long-term downtrend, the shares could suffer from added selling pressure.

Sentiment indicators for Valero Energy

The Verdict?

I have to say that a January 2009 26 put position on VLO looks pretty sound. The stock has yet to prove that it can sustain any form of short-term rally, with overhead technical resistance placing considerable pressure on the security. Furthermore, bullish investors will undoubtedly tire of the stock’s pattern of lower highs and lower lows. Finally, another unexpected drop in crude oil prices could lend further downward pressure to the security.

Newly revised and updated, Bernie Schaeffer’s home study program, “10 Days to Successful Options Trading,” provides a foundation for your options trading success. Includes easy-to-follow guide, CD, DVD, and a special report – Click here to learn more.

Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.