Oil and gas refining name
Valero Energy Corporation
) was targeted Friday by aggressive options bulls, who are
anticipating a sharp pop higher by the end of the year. This
bullish speculation transpired as the stock shook off a
brokerage downgrade from Oppenheimer
to finish higher on the day.
About 37,000 Valero calls changed hands throughout Friday's
session, more than quadrupling average call volume on the equity.
Most active by a healthy margin was the December 39 call, where
nearly 18,700 contracts (including one block of 14,251) crossed the
tape. More than 17,000 of these translated as new open interest
over the weekend. As the lion's share of the volume traded at the
ask price and implied volatility inched higher, it's probable that
these out-of-the-money calls were purchased to open -- for a
volume-weighted average price (VWAP) of $0.39.
These call buyers will be in profitable territory at expiration if
VLO is trading above $39.39 (the strike price plus the VWAP), which
is a 16.2% jump from the stock's current perch at $33.91. In fact,
VLO has not traded north of the $39 mark since early June. The odds
of the call achieving in-the-money status between now and
expiration on December 20 are now less than 1-in-5, based on the
option's current delta reading of 0.17, or 17%.
Still, VLO has a good track record in the earnings confessional,
and this may be what Friday's call buyers are focused on. Valero
has topped analysts' earnings estimates in seven of the past eight
reporting periods (by an average of $.19 per earnings beat). What's
more, following its last eight earnings disclosures, VLO has gained
an average of 1.8% and 4% in the subsequent day and week,
Valero will issue its third-quarter earnings before the open on
October 29, and analysts are expecting profits of $.78 per share.
Heading into this report, implied volatility (IV) has been edging
higher. In fact, the IV for the December 39 call is currently
31.7%, versus the equity's three-month historical (realized)
volatility of 25.6%. In short, VLO speculators are willing to pay a
slight premium to bet on the stock ahead of earnings.
This article by Beth Gaston was originally published on
Schaeffer's Investment Research
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