VLO – Valero Energy Corp. – An investor expecting the price of the oil refiner’s shares to move significantly ahead of September expiration appears to have purchased a sizeable long strangle today. Valero’s shares rallied as much as 1.7% during the first half of the trading session to secure an intraday high of $18.29. The stock is currently up 1.05% on the day to stand at $18.17 just before 11:40 am ET. Hoping to see the price of the underlying stock move, the strangle strategist purchased 7,500 puts at the September $17 strike at a premium of $0.47 each, and picked up the same number of calls at the September $19 strike for a premium of $0.48 apiece. The net cost of the transaction amounts to $0.95 per contract. The strangle positions the investor to benefit from wayward shifts in the price of Valero’s shares through expiration next month. Shares must rally at least 9.8% to surpass the upper breakeven price of $19.95, or plunge 11.7% lower to breach the breakeven point on the downside at $16.05, in order for the investor to start to make money on the trade. The strangler may also benefit if options implied volatility on the stock increases ahead of expiration. Increases in IV tends to lift premium on both call and put options and could allow the trader to sell the strangle at an advantageous price. Valero’s shares last traded above $19.95 on May 28, but have not traded below $16.05 since December 4, 2009.
Affiliation: Interactive Brokers
Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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