Valero Energy Corp. (NYSE: VLO) stock is trading lower today despite rising oil futures after the US House of Representatives passed an energy bill that will pay for $17 billion dollars of tax credits for wind and solar energy production by ending tax incentives for oil and natural gas producers. Though the bill still must pass the Senate and be approved by the President, this could be a bad sign for the oil industry, long a beneficiary of Congressional subsidies. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on VLO.After hitting a one-year high of $78.68 in July, the stock hit a one-year low of $47.80 in January. This morning, VLO opened at $60.93. So far today the stock has hit a low of $57.92 and a high of $60.93. As of 11:00, VLO is trading at $58.01, down $2.80 (-4.6%). The chart for VLO looks neutral and improving slightly, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bearish hedged play on this stock, I would consider a June bear-call credit spread above the $75 range. A bear-call credit spread is an options position that combines the purchase and sale of call 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 a 5.3% return in four months as long as VLO is below $75 at June expiration. Valero would have to rise by more than 29% before we would start to lose money.
VLO hasn't been above $75 since July and has shown resistance around $71 recently. This trade could be risky if the price of oil keeps rising. This is note likely with a slowing economy, but even if it happens, this position could be protected by resistance VLO might find at its 200 day moving average, which is currently around $67.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in VLO.
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