Valero Energy at 20-Day MA Buy Point

Valero Energy Corporation (NYSE:VLO)shares have pulled back in the past few days close to its 20-day moving average.  The stock has shown great price strength lately as shares have made 15 new highs in the last month.  If you are considering this stock for investment and are a little afraid to pull the trigger and buy stock shares, consider the following strategy to buy shares.

Based on rates recently checked, buying 100 shares of Valero Energy Corporation (NYSE:VLO) for $24.03/share and then selling the $24.00 February 2011 Call contract for $1.00 could net you 4.21% profit if VLO closes above $24.00/share at the expiration date in 30 days.  Not bad for 1 months of investing and your average monthly gain would be 4.28%.  That may not sound like a lot, but the Compound Annual Growth Rate (CAGR) on the assigned option position is 65.2%, which is better than market average of about 10%.  Additionally, with this position, you would have a big downside protection to $23.03, or about a 4.2% drop in stock price where you would still break even.

Now you ask, what if VLO drops 4.2% and closes below the $23.03 breakeven point?

Well, if VLO closes below $23.03 at any time during the trade you can roll down the position by purchasing back the $24.00 February 2011 Call contract and then selling another call at a lower strike (say the $23.00 strike) and/or further date out to make up for any losses caused by having to buy the $24.00 February 2011 Call back.  Depending on when the stock drops, you will likely still hold a profit or can sell out of the position for even money.

If shares of Valero Energy Corporation (NYSE:VLO) continue to drop, you now own the stock for less than well below $23.03/share when you were originally interested in buying at $24.03/share.  That seems like a pretty sound investment.

Good luck to investors!