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Tesoro Corporation (NYSE:TSO - 40.08) is a quiet outperformer, rising more than 70% in 2012 and outpacing the S&P 500 Index (SPX) -- on a relative-strength basis -- by nearly nine percentage points during the last 20 trading days. The positive price action has gone largely unnoticed, at least among option players. For example, the 10-day call/put volume ratio of activity on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) measures 1.09, meaning buy-to-open calls are in only slightly higher demand than puts. What's more, this ratio is lower than 65% of the past year's readings.
Elsewhere, Schaeffer's put/call open interest ratio (SOIR) for TSO stands at 0.93, meaning there are 93 open puts in the front three-month series of options for every 100 open calls. This reading is relatively average, in the 55th annual percentile.
Schaeffer's Senior Options Strategist Tony Venosa, CMT -- in his "Chart of the Day" column -- recently offered eight reasons supporting the long case for the refining company. For example, the stock -- which has held up well during the last rocky month -- continues to trend above support at its 80-day moving average. Meanwhile, nearly 7% of the stock's float is sold short, indicative of more pessimism toward the shares.
There was a flicker of bullish attention yesterday, however, as an investor evidently opened a three-legged spread targeting additional upside in the shares. Three strikes were in the spotlight near the closing bell -- the January 42 and 45 calls and the January 35 put -- and all have seen increased open interest today.
It looks as though the trader sold to open a 1,635-contract block of the out-of-the-money puts, collecting a premium of $0.73 per contract, in order to buy 1,635 of the 42/45 call spreads for a net debit of $0.85. The total cost for the three-legged spread, then, was $0.12 each. The strategy calls for TSO to rally as high as the 45 strike by January expiration. At this level, gains are capped at $2.88 -- the difference in call strikes, less the premium for the call spread, plus the premium collected for the short put, which will expire worthless on a close above $35.
Between the 35 and 42 strikes, losses are contained to the overall premium paid ($0.12 per spread) but losses are unlimited down to zero south of 35 because of the short put. In a nutshell, this is a bullish strategy where the trader employed a put to reduce his initial premium outlay. While the potential reward is higher, the risk is also higher, given the unlimited downside potential on a move south of $35.
Finally, it's notable that the ex-dividend date for TSO is Nov. 28 (next Wednesday), which will impact option pricing. The expected quarterly dividend payout is $0.15 per share.