[Options] Looking For an Energetic Breakout

Sean McLaughlin
March 4, 2024

This morning, my Head Technical Analyst Steve Strazza joined me on The Flow Show to put our heads together on a new trade:

Strazza loves the Energy sector here, and of all the charts he likes, I liked this one in Valero Energy $VLO the best:

Best of all, options premiums are near the lowest levels of the year for $VLO:

This isn't entirely surprising. The stock has been consolidating just below all-time highs since early 2022. And the consolidation has been continually tightening.

Sideways markets may not stop you out of your positions, but they are likely to wear you out. And when traders are exiting their positions giving up on the thought of any directional movement, options premiums tend to decline because few participants feel the need to protect their positions or aggressively bet on accelerating price change.

This creates an opportunity for those of us who can position ahead of the big perspective change that comes with new all-time highs.

Here's the Play:

I like buying $VLO September 175 calls for $4.50 per contract (or cheaper!). Today's premium represents the most we can lose in this trade. But I'll look to exit my position sooner if either one of two things happens:

  1. $VLO shares see a closing price below $138 per share. That is a signal that the pattern still needs more time to develop. Or,
  2. The value of our calls declines by 50%. This could happen even if the stock moves in our direction, but does it too slowly. When we're long out-of-the-money options, time is our enemy. So if the calls lose 50%, regardless of what the chart tells me I'll close the position to prevent any further losses.

In the meantime, if $VLO follows through to the upside, I'll look to sell a portion of my position to lock in some gains if $VLO trades above our strike price of $175. Then I'll hold the rest and see how much more of the blue skies $VLO would like to explore!

If you have any questions on this trade, please send them here.

If you missed last week’s video Jam Session, you can catch a replay on Stock Market TV.

~ @OptionsSean

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! Or give us a call to learn more: 323-421-7910.

Filed Under: