Valero Energy (NYSE: VLO - option chain) stock is down big today after the company warned it expects to report a second-quarter loss of 50 cents per share. Analysts had forecast a profit of 74 cents per share. The company also said it plans to sell about 40 million shares of common stock to fund general corporate purposes and recent acquisitions. 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.This morning, VLO opened at $19.64. So far today the stock has hit a low of $18.50 and a high of $19.79. As of 11:25, VLO is trading at $18.75, down $3.63 (-16.2%). The chart for VLO looked bullish before today while S&P gives VLO a positive 4 STARS (out of 5) buy ranking.
For a bearish hedged play on this stock, I would consider a September bear-call credit spread above the $26 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 $26 at September expiration. Valero would have to rise by more than 38% before we would start to lose money. Learn more about this type of trade here.
VLO hasn't been above $26 since January and shown resistance around $23.50 recently.
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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