[Options] Open the Valve to High Prices
Let's start with the chart:
I can only speak for myself, but recent price action (shown by those blue lines) feels to me that there is some pent-up demand that is buying every dip. It looks like a stirring brew of Institutional Money positioning themselves in a consistent dividend payer, swing traders starting to worry about FOMO, and day traders looking to play a pop.
Regardless of who gains the upper hand, all three of those forces will likely conspire to create higher prices for shares of $VVV over the next several months.
Here's what the guys had to say about $VVV in their latest report:
Our next setup is the $6.5B Valvoline Inc $VVV, which manufactures and sells automotive oil and other products, in addition to owning oil change and car repair centers around the United States.
Depending on your data provider, Valvoline is either a materials or an energy stock. Regardless of the classification, the company has commodities exposure, and that’s been a tailwind in the current environment. It pays a 1.4% yield and has grown it consistently every year since coming public in 2016.
We got long this name in March, after it broke out of a big base. It recently hit our objective and has been consolidating in a tight continuation pattern in the few weeks since. With price coiling up at record highs in the context of a strong uptrend, we have no reason to think it won’t resolve to the upside.
As long as we’re above 36 we want to stick with this winner with a target of 52.50 over the next 2-4 months.
As you know, we're not big on the narrative of any particular stock or company. We just care about price -- the final arbiter of right and wrong. But nonetheless, I brought up to the guys that in addition to their comments above, we also have the backdrop of high demand for used cars in the US due to supply constraints affecting new car sales. People are holding on to their cars longer than they used to... and that requires more demand for routine maintenance and the products required to that end. All of this plays into the hand of Valvoline.
Now, does any of that really matter in terms of our upcoming swing trade over the next few months? Probably not. But it might, and it's interesting, so that's why I bring it up.
Ok, so we want to get long for a move towards that $52.50 price target. How should we go about it?
Here's How I'm Playing It:
I like buying $VVV April 40 calls for approximately $1.50 per contract. These calls are currently out-of-the-money but will give us nice leverage if $VVV makes a run north of $50. And the $1.50 I pay today represents the most I can lose if I'm dead wrong.
For a deeper dive on how I manage winning long call trades, I urge you to give this a read. I'll wait...
As per the link above, I'll be looking to sell half of my calls for around $3.00 if/when I get the opportunity. And if I do, then I'll hold on to the rest of the position into April and try to ride as much of a wave as I can -- risk free! (#FreeRide).
Of course, we have to be prepared for being wrong. Believe it or not, we're not always right. And we're often too early! So, the level we're watching is $35 per share. If $VVV can't hold and closes below $35, that will be my signal to close the valve and exit the trade for whatever scraps of options premium I can salvage.
JC and I will be doing a live stream on Twitter this afternoon to discuss this trade. You'll be able to find it on my stream live or archived anytime after 3:30ET today.
Meanwhile, if you have any questions on this trade, please send them here.
ASO subscribers, if you missed last week’s live Jam Session where I review adjustments and exits I made during the week, you can catch it here.
P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free!