Although fuel producer Valero Energy (VLO) may not have enjoyed the most fantastic post-earnings performance, bullish speculators should keep close tabs on VLO stock. Last week, the security printed a rare quantitative signal in the charts that points to a highly probable sentiment reversal.
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First, the actual print from Valero’s second-quarter disclosure was quite strong relative to analysts’ expectations. On the bottom line, the energy giant posted earnings per share of $2.28, beating the consensus estimate of $1.75. On the top line, Valero rang up $29.89 billion, exceeding the anticipated sales tally of $27.51 billion.
Still, the bears dominated trade following the news on July 24th. In particular, it appears that investors took a dim view of Valero incurring a decline in net income to $714 million attributable to shareholders in Q2. In the year-ago quarter, net income stood at $880 million.
Still, at the end of the day, what matters most is the market’s willingness to buy VLO stock. If enough people are willing to move the needle, that’s a first-order principle that we can utilize to determine not only how VLO trades but what we might expect in the future.
Consider the Overlooked Data for VLO Stock
Typically, a financial publication article on VLO will focus on the underlying business metrics relative to the broader sector. In a world before AI, there was genuine demand for humans to research publicly traded companies and connect the dots. With generative AI engines rapidly raising their utility while simultaneously minimizing their hallucinations, there is simply no need for legions of human researchers.
Meanwhile, many technical analysts are convinced that 50-day and 200-day moving averages offer valuable insights. What does taking the sum of closing prices over 50 and 200 days and then dividing that total by 50 or 200 do? It’s just an arbitrary arithmetic exercise.
Now, I admit that because traders often look at these common technical indicators, they could be psychologically significant. However, technical indicators are not states but rather continuous signals. So, it’s difficult (if not outright impossible) to tell if the current indicator is significant or not.
That’s why I’m a big proponent of converting price action into discrete events. For example, in the past 10 weeks, the market effectively voted to be a net buyer of VLO stock four times and a net seller six times. From the beginning of this period to the end, the security saw an upward trajectory. For brevity, we can classify this sequence as 4-6-U.
At first, it may seem strange, maybe even stupid, to compress VLO’s price dynamism into a simple binary code. However, we have converted a messy signal into a discrete, falsifiable sequence. We can now look back and compare how VLO stock performs relative to other sequences.
Mapping Out a Decision Tree for Valero Energy
Conducting the above discretization exercise for VLO stock (going back to January 2019) across rolling 10-week intervals gives us the following demand profile:
From the data above, the chance that a long position in VLO stock will be profitable on any given week is 52.48%. Essentially, this is our null hypothesis, the assumption that there is no mispricing in the security. However, my alternative hypothesis is that because of the 4-6-U sequence, the odds of upside now stand at 91.67%. As such, there is an incentive to consider a debit-based options strategy.
Assuming the positive pathway, the median expected return following the flashing of the 4-6-U is 1.33%. With VLO stock rising nearly 2% on Monday, Valero is moving ahead of schedule. However, what makes the energy giant enticing is that — if the bulls maintain control of the market from here on out — we could see more gains down the road.
For those who aren’t afraid of aggressive wagers, the 150/155 bull call spread expiring Sep. 19, 2025, looks intriguing. This transaction involves buying the $150 call and simultaneously selling the $155 call, for a net debit paid of $183 (the maximum possible loss). Should VLO stock rise through the short strike price of $155 at expiration, the maximum reward is $317, a payout of over 173%.
For a more probabilistically safer bet, the 145/150 bull spread (also expiring on Sep. 19) is interesting. However, the max payout is much lower at 96%.
Is VLO a Good Stock to Buy?
Turning to Wall Street, VLO stock carries a Moderate Buy consensus rating based on nine Buys, five Holds, and zero Sell ratings over the past three months. The average VLO stock price target is $156.33, implying almost 10% upside potential over the next 12 months.
Leveraging Probability to Craft a Stock Options Strategy for VLO
Although the market initially didn’t respond well to Valero Energy’s Q2 earnings report, investors have subsequently come around to the opportunity. In doing so, they pinged a statistical signal that wouldn’t be obvious to observers unless they discretized the price action of VLO stock. By conducting this unusual exercise, we can craft a decision tree that effectively incentivizes a bullish posture.