Why Call Traders Should Buy Valero Energy Stock's Dip

VLO has room to run back to heavy call strikes

Jun 21, 2022 at 11:33 AM
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On Friday, Valero Energy Corporation (NYSE:VLO) stock pulled back to just above its most recent earnings reaction high around $107.25. This area roughly coincides with VLO’s 80-day moving average, a trendline that hasn’t been breached on a closing basis in 2022, acting as support in April 2021 and  January 2022. It also was the site of resistance in July 2020, implying this moving average has had historical significance. Plus, there’s additional support at the shares’ +50% year-to-date level.

 

VLO Chart June 21
The catalyst for this week’s mini-selloff was the rumor and news today that the Biden administration is considering limiting fuel exports. The sharp pullback could also have been exacerbated by an unwinding of long positions related to expiring June 120- and 125-strike calls, which ultimately expired out of the money. Today’s low came around $110, which is the first strike where put open interest exceeds call open interest for all options expiring next week into September standard expiration. Now, VLO has room to run back to heavy call strikes up at $135 and above before September. Additional tailwinds could come from the J.P. Morgan energy conference on June 22.
 
Shorts remain in covering mode, but short interest is still 30% above its 2019 lows. Options are certainly the route to take a flier on VLO, too, considering the stock’s Schaeffer's Volatility Scorecard (SVS) tally of 98  out of 100. This indicates the equity has consistently realized bigger returns than options traders have priced in over the past year, a boon for options traders.
 
Finally, our recommended call has a leverage ratio of 5.0 and will double in a 20.4% pop in the underlying equity.

 

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