Valero is down almost 10% this week after a huge volume day yesterday. I detailed the large options volume and reason behind the move in this morning’s TMO post:
VLO – Stock declined to its lowest level since early March on the largest volume day for VLO since mid-2009. The catalyst was news from the U.S. Commerce Department that it will allow a wider definition of oil products to be exported from the U.S., which is likely to increase the costs for refiners, especially in Texas, as oil producers export more domestic petroleum products abroad. 30 day implied vol increased about 6 points on the news. Calls were much more active than puts, and the Aug 55 calls traded over 16k at an average price of 1.21.
Even with VLO’s decline this week, the stock is still up nearly 4% year-to-date, and has been a major outperformer over the past 2 years. The monthly chart shows the breakout above the $43.50 level in November:
Throughout 2014, the stock has consolidated between $50 and $60 for the most part after the strong run from October to January. VLO tested the lower end of that range on yesterday’s high volume selling (see lower panel):
The rising 200 day moving average is now around $48.50, while $50 is crucial psychological support. $55 is the first resistance level on the upside.
Fundamentally, VLO is a difficult name to figure out, since traditional valuation metrics are always significantly lower in VLO than in other stocks. For example, here is trailing 12 month P/E and EV/EBITDA for VLO over the last 10 years:
An 11 P/E and a 4.3 EV/EBITDA would be extremely attractive for investors in most situations. But VLO’s earnings volatility over the past decade has been a major hindrance to the stock’s multiples, as investors have shied away from paying higher valuations for VLO given its history.
That’s likely one big reason why traders have turned to options this week. The uncertain impact of the news on Valero’s already volatile business has traders looking for defined risk ways to put on VLO exposure. VLO remains rangebound technically, but implied volatility is likely to rise in the coming months if the headline risk remains.