October 31, 2022

Dear Friend,

The numbers for 2022 to date:

S&P 500 (SPY) – LOST 22%
Nasdaq 100 (QQQ) – LOST 31%
Russell 2000 (IWM) – LOST 22%
Microsoft (MSFT) – LOST 28%
Terry’s Tips Option Portfolio Composite – GAINED 10% (using the above underlyings)

Five-Year Average Annual Gain for Terry’s Tips portfolios – just under 60%. (All numbers are from actual accounts including all commissions).

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Go With VLO

Oil refiner Valero Energy (VLO) reported earnings this week that either missed or beat both profit and revenue estimates, depending on the source. I won’t quibble with who’s right or wrong. What’s important is that revenue and profits soared above the figures from a year ago. Moreover, VLO’s CEO said that product demand surpassed 2019 levels.

The report was met with target price increases from several analysts. What’s interesting about VLO compared to most stocks, though, is that the average target price is only 9% above Friday’s closing price. In other words, it’s reasonable. To me, that adds some weight to the price increases we saw this week.

On the charts, the stock is down a bit since earnings. But the month-long uptrend remains intact, assisted by the 20-day moving average. The shares have not closed a day below this trendline in October, a period that includes a pullback that tested support. Based on this support, we’re going with a put credit spread with the short put strike sitting right on the 20-day (blue line) and will soon be below it. Thus, the stock will have to break through the trendline to move the spread into the money.

If you agree that VLO will continue to respect the 20-day, consider the following trade that relies on the stock staying above $120 (red line) through expiration in seven weeks:

Buy to Open the VLO 16 Dec 115 put (VLO221216P115)
Sell to Open the VLO 16 Dec 120 put (VLO221216P120) for a credit of $1.65 (selling a vertical)

This credit is $0.02 less than the mid-point price of the spread at Friday’s $125.98 close. Unless VLO surges quickly, you should be able to get close to that price.

The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $163.70. This trade reduces your buying power by $500, making your net investment $336.30 per spread ($500 - $163.70). If VLO closes above $120 on Dec. 16, both options will expire worthless and your return on the spread would be 49% ($163.70/$336.30). 

Any questions?  Email Terry@terrystips.com

Testimonial of the Week

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Happy trading,

Terry