Valero Energy Corp. (NYSE: VLO) shares are rising this morning, as crude oil prices jumped following a new outbreak of violence in Nigeria and amid expectations that U.S. crude-oil inventories will fall for the seventh straight week. There are also market concerns about supply after OPEC warned it may not meet demand starting in 2024. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on VLO.After hitting a one-year low of $47.66 in January, the stock hit a one-year high of $78.68 in July. VLO opened this morning at $70.17. So far today the stock has hit a low of $69.89 and a high of $71.12. As of 10:50, VLO is trading at $69.93, down $0.10 (0.1%). The chart for VLO looks neutral and improving, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a February bull-put credit spread below the $62.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 11.1% return in just 2 months as long as VLO is above $62.50 at February expiration. Valero would have to fall by more than 10% before we would start to lose money.
VLO hasn't been below $62.50 by more than a few cents since March and has shown support around $70 recently. This trade could be risky if the price of oil drops off in the coming months, but even if that happens, this position could be protected by the support the stock might find just above $69 from its 200 day moving average.
Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in VLO.
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