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Valero Energy Corporation Speculators Bet on Earnings Blowout

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Out-of-the-money calls are active ahead of VLO earnings.

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Oil and gas refining name Valero Energy Corporation (NYSE:VLO) was targeted Friday by aggressive options bulls, who are anticipating a sharp pop higher by the end of the year. This bullish speculation transpired as the stock shook off a brokerage downgrade from Oppenheimer to finish higher on the day.

About 37,000 Valero calls changed hands throughout Friday's session, more than quadrupling average call volume on the equity. Most active by a healthy margin was the December 39 call, where nearly 18,700 contracts (including one block of 14,251) crossed the tape. More than 17,000 of these translated as new open interest over the weekend. As the lion's share of the volume traded at the ask price and implied volatility inched higher, it's probable that these out-of-the-money calls were purchased to open -- for a volume-weighted average price (VWAP) of $0.39.

These call buyers will be in profitable territory at expiration if VLO is trading above $39.39 (the strike price plus the VWAP), which is a 16.2% jump from the stock's current perch at $33.91. In fact, VLO has not traded north of the $39 mark since early June. The odds of the call achieving in-the-money status between now and expiration on December 20 are now less than 1-in-5, based on the option's current delta reading of 0.17, or 17%.

Still, VLO has a good track record in the earnings confessional, and this may be what Friday's call buyers are focused on. Valero has topped analysts' earnings estimates in seven of the past eight reporting periods (by an average of $.19 per earnings beat). What's more, following its last eight earnings disclosures, VLO has gained an average of 1.8% and 4% in the subsequent day and week, respectively.

Valero will issue its third-quarter earnings before the open on October 29, and analysts are expecting profits of $.78 per share. Heading into this report, implied volatility (IV) has been edging higher. In fact, the IV for the December 39 call is currently 31.7%, versus the equity's three-month historical (realized) volatility of 25.6%. In short, VLO speculators are willing to pay a slight premium to bet on the stock ahead of earnings.

This article by Beth Gaston was originally published on Schaeffer's Investment Research.

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