Gains over 70% in 3 days.
The Play: Long Call - Play #1
This post best suited for: Beginners
Outlook: Bullish
Who should run this play: Veterans and higher
Trader: JBManning
Trade Setup: For this play, we want the stock to go up, up, and away like a first inning lead off homerun. Second inning would be fine too, but sooner is better than later.
Trade Status: Closed; entry and exit data
Trade Recap:
VLO = 51.60 as of 4/3/08 close
3/31 11:34am Trade 1: Bought to open 1 VLO Apr 47.50 call @ 2.97 VLO = 49.11 at close
4/2 2:55pm Trade 2: Sold to close 1 VLO Apr 47.50 call @ 5.10 VLO = 51.97 at close
Trade Result: +72% ROI; $2.13 profit per contract
Trade Duration: 3 days
Trade Note: "Valero is a fun company to trade... it's one of those companies that you grow fairly intimate with and begin to get a feel for. I decided to go with these slightly ITM calls after watching a pennant formation forming on both the daily and hourly charts.
I don't know where the seasonal refiner run might bring us this year - is the run inevitable or likely to NOT occur because so many feel that it may be inevitable? Valero looks as if it could run to 55-56 area and still be in its current downward trend. It will likely take a confluence of events to get it to break from that trend... That gives me another $4 of upside in the underlying on these calls...
Margins are on the way up. This year isn't the same as past years - refiner maintenance peaked 2 months later than last year (March versus Jan), diesel margins incredible - just a tough market overall though.
Who knows though - today is the EIA inventory report and that could change everything in just a few short minutes." - JBManning long call entry in Valero
Pertinent information: There was a period of renewed buying interest after a weekly inventory report from the Dept. of Energy showed a much larger than expected build in crude inventories. The headline initially prompted a drop of more than a dollar in oil prices, but they soon rebounded on the indication that gasoline stockpiles fell more than expected, raising concerns about inventories ahead of the summer driving season. Oil ended the day 3.8% higher at $104.86 per barrel. Gains across the energy complex drove the outperformance of the energy sector, which gained 1.4% and was the best-performing of all ten economic sectors. - from Briefing.com 4/2/08
Next Earnings Announcement: 4/29/08
Rookie's Corner: A long call gives you the right to buy the underlying shares at Strike Price A (47.50). Calls may be used as an alternative to buying the stock. You can profit if the shares rise, while limiting the risk that could result from purchasing the stock. It is also possible to gain leverage over a greater number of shares because calls are usually considerably less expensive than the stock itself. But be careful, especially with short-term out-of-the-money calls. If you buy too many option contracts, you are actually increasing your risk. Options may expire worthless and you can lose your entire investment, whereas if you own the stock it will usually still be worth something.
Break-even at Expiration:
Strike A plus the cost of the call. (47.50 + 2.97 = 50.47)
The Sweet Spot:
The stock goes through the roof.
Maximum Potential Profit:
There's a theoretically unlimited profit potential, if the stock goes to infinity.
Maximum Potential Loss:
Risk is limited to the premium paid for the call option.
Margin Requirement:
After the trade is paid for, no additional margin is required.
As Time Goes By:
For this play, time decay is the enemy. It will negatively affect the value of the option you bought.
Implied Volatility:
After the play is established, increasing implied volatility is your friend. It will increase the value of the option you bought. It also reflects an increased possibility of a price swing (without regard for direction).
JBManning,
Thanks for sharing your enjoyment with all of us. The Community really values your comments. It looks like VLO traded nearly $3 higher on the gasoline inventory news, finishing the day up around $1.70. That might explain your exit in the calls with over a 70% gain the same day.
I see that you selected to buy an in-the-money option. How did you make your decision? Some traders may choose strikes based on the Delta. If the long call option is a substitute for a long stock position, a higher Delta may be appropriate. Brian Overby has a great series on this topic (click here to read more).
One of the locations where the Delta of an option may be found is on TradeKing's chains. An image is below detailing most of the great features they contain. Some you may recognize, others are brand new this week. Check it out first hand under Quotes+Research > Option Chains. Other locations are under the Tools menu in the Option Calculator or the Profit+Loss Calculator.
Click here for a larger image.
As for the company itself, Valero has received a Buy ranking from Market Grader (Quotes+Research > Research Reports). This may not apply for the trade we are discussing, but I did notice this is a company you trade somewhat actively. Although the tools we offer may be helpful, you must ultimately decide whether or not to put your money at risk in the market.
Click here for a larger image.
Nice job in scooping up a sweet return on VLO and thanks for telling us all about it.
TradeKing Staff
For a list of previous All-Star Trades, please click here.
This comment and any market data included here were prepared on 4/6/08.
Options involve risk and are not suitable for all investors.
Please read Characteristics and Risks of Standardized Options.
While Delta represents the consensus of the marketplace as to the theoretical price movement of the option relative to the underlying security there is no guarantee that this forecast will be correct.
