VLO: Refined Calendar Spread

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Valero Energy (VLO) is in the oil and gas refining and marketing business. That means VLO makes gasoline from crude oil and then they sell it at their gas stations. Somebody is making a lot more money now that gasoline is above $4 per gallon. However, VLO analysts think the company is doing only fair for now, with better earnings on the way over the remainder of fiscal 2012.

Meanwhile, back to the game of, "What have you done for me lately?" VLO continues to drop from its 2012 high made in early March around $28.50 to where it closed yesterday around $23.35. That is a serious decline for only six weeks. The catalyst for the selling was the news that VLO is closing down a refinery (in Aruba) because it was not a profitable operation. The company announces Q1 earnings results on May 1, and I am sure it will comment fully on this management decision.

The expected earnings for Q1 are $0.20 per share, a small increase on a year-over-year comparison with 2011. For Q2 the average earnings guesstimate (of 14 VLO analysts reporting to Yahoo! Finance) is $1.56 per share compared to $1.30/share which would be a 20% increase year-over-year. For fiscal year 2012 the average earnings guesstimate is for VLO to have earned $3.67 per share compared with $3.38 per share in fiscal year 2011 which ends in December. VLO is now trading with a trailing P/E of 6X and a forward P/E of 5X, which is seriously and cheaply low for any stock! The dividend yields 2.50%, a $.60 per share payout annually. That has plenty of room for improvement as VLO grows its earnings and serves as a downside governor for its stock price.

If you believe the analysts in VLO's business sector you begin to scratch your head as to when the best time and price is for this company relative to the price of crude oil. VLO has a 52-week price range of $16 to $29. That fact is not missed by options traders who are currently using mid-40s volatility for VLO options. VLO has decent options liquidity and tight enough markets as per the spread between the bid and ask.

Before we get into the options strategy, let's take a look at the T3/OP video with Jill and Marc as they further review fundamentals and the chart.

The trade tactic I prefer for VLO now is the calendar spread. This type of spread is 100% risk controlled. It is medium as per its risk level and open-ended, for now, as per its reward potential.

Trades: Sell to open 3 VLO May 24 calls at $0.90 and buy to open 3 VLO June 24 calls for $1.30.

The total risk for the trade is the premium paid for the spread, or $0.40 per spread. As always, I will monitor the trade on this site in the comments section below.

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