Valero Energy Corp (VLO)
A diagonal spread initiated on the operator of refineries within the first ten minute of the trading session suggests one options trader expects the price of the underlying stock to extend gains over the next several months.
- It looks like the investor purchased 6,000 calls at the January 2011 $22.5 strike for a premium of $0.50 each
- Sold the same number of calls at the March 2011 $25 strike at a premium of $0.40 apiece
- The net cost of getting long the nearer-term January 2011 strike contracts amounts to $0.10 per contract
A very nice strategy here.
The trader has locked into the right to purchase shares in Valero Energy Corp. at $22.50 each if
the calls land in-the-money by January 2011 expiration day. VLO's shares must rise at least 6.4% over the current price of $21.14 in order to trade above $22.50. If this occurs, the investor may decide to take ownership of the shares at an effective price of $22.60 each, given the $0.10 net premium per contract paid to purchase the spread today. Profits start to accumulate for the trade should Valero's shares rally 6.9% over the current price of $21.14 to exceed the breakeven price of $22.60.
The short position in calls at the March 2011 $25 strike suggests the investor is willing to have the shares called from him at that price should the options land in-the-money at expiration. If the shares are called from him at $25.00 each, the trader will have managed to walk away with gains of 10.6% on the value of VLO's shares.