Oil refiners including Valero Energy have been building a base
this year after a miserable 2009, and now the activity is turning
Stocks such as VLO, Sunoco, and Western Refining are up at least 13
percent since Jan. 1, more than double the performance of the
S&P 500. That marks a big change from last year, when all three
registered double-digit losses and the broader market surged 28
Option activity has also been turning more bullish, especially for
VLO. Not only have calls outnumbered puts by more than 2 to 1 over
the last month, but the calls were largely purchased while the puts
were sold. Similar buying patterns, which reflect an upside bias,
appear on a much smaller scale in SUN and WNR.
Both technical and fundamental trends suggest that better times lie
ahead. The most important technical indicator is their relative
outperformance versus the broader market.
VLO, SUN and WNR also show broad basing patterns while their
moving average convergence/divergence indicators suggest that
positive momentum is building. The so-called MACD oscillator, while
not a perfect tool, behaved similarly on the S&P 500 as it
bottomed in March 2009 and March 2003.
There are also bullish factors developing for the refiners on a
fundamantal basis after several quarters of losses and
restructuring charges. These companies now face the prospect of
improving demand from the U.S. consumer shortly after cutting large
amounts of capacity. That's a similar positive combination that the
airlines faced about six months ago, and most of them have roughly
doubled since then.
VLO's last earnings report on Tuesday showed this turn for the
better: The loss was narrower than expected and revenue beat
forecasts, while the operating margin improved from -1.17 percent
in the fourth quarter to -0.16 percent in the first quarter.
If investors believe that the stocks are near their lows, they may
want to consider options rather than simply buying the shares. One
moderately potential strategy is the combination trade, which can
generate big leveraged gains at minimal expense.
For instance, an investor could sell VLO's December 19 puts for
$1.83 and buy the December 22 calls for $1.83, resulting in no
outlay except for the commission. The trader would profit if shares
rose above $22 and face losses below $19.
I particularly like this trade because the stock established
support around $19 last week, which reduces the risk of loss. VLO
rose 2.66 percent to $20.43 yesterday.
This is reminiscent of a trade on Gap last spring, when the shares
were sitting at support and the retailer's business was improving.
An investor took maximum advantage of that setup using options and
earned a quadruple-digit return from a 25 percent move in the share
The situation now looks similar for refiners. Their fundamentals
are improving and their charts are showing significant upside
potential with limited downside risk. It could be a good time to
place a long-term bet using options.
I am long VLO.
(Chart courtesy of tradeMONSTER)