Trading Valero Energy (VLO) on Earnings Expectations

07/23/2009 12:01 am EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

Valero Energy Corporation (VLO) is less than a week away from its second-quarter earnings report, which is due to hit the Street before the market opens next Tuesday, July 28. Analysts have relatively low expectations, with consensus estimates calling for a loss of 48 cents per share, down sharply from VLO's year-ago profit of $1.37 per share, which was reported right around the same time the commodities bubble popped.

VLO price chartMany option players are also preparing themselves for a negative surprise, judging by recent activity on the International Securities Exchange (ISE). On Tuesday, traders on the ISE bought to open 6,895 puts on VLO, compared to just 612 calls. In fact, the stock's ten-day ISE put/call volume ratio of 0.97 is just 12 percentage points away from a 52-week peak of pessimism.

However, the bears aren't the only ones placing their bets ahead of earnings. At least one trader on Tuesday just couldn't settle on a directional bias, and opened a long-term straddle as a result. Two blocks of 250 contracts apiece traded yesterday afternoon at VLO's January 2010 17.50 call and 17.50 put, with each trade occurring at the respective ask price.

By implementing a straddle, the speculator in this situation will benefit whether VLO rallies or plunges post-earnings. Judging by the stock's current perch, there's ample room for movement in either direction. The shares are currently hovering near the middle of a sideways channel between $14 and $26. This trading range has confined the equity's movement since mid-October 2008.

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By Elizabeth Harrow Schaeffer's Trading Floor Blog

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