DGI Adventure 06-09-16 Sold Cash Secured Put +Investment Thesis (revisited) – Valero Energy Corporation (VLO) – $53.00 strike – June 24 Expiration

Please visit the core philosophies article on my investment thesis process for a deeper explanation of the components of this article.

I went through this exercise approximately 6 months ago when I bought 26 shares of VLO at a cost basis of $66.67 in my taxable account. The stock price is obviously down quite a bit since then. If shares get assigned, I can average down, while moving my exposure to this high yielding stock into a tax advantaged account.

Dividend Cycle

VLO should go ex-dividend around late July or mid-early August. The company has raised dividends for five consecutive years, making it a dividend challenger. The current distribution is $0.60/share where it’s been the past two quarters after management unexpectedly (at least to me) raised it from $0.50/share. I don’t think they’ll raise it again for a while, but who knows. This contract will expire before the ex-dividend.


Yesterday I sold one cash secured put on VLO with a $53.00 strike price and a June 24th 2016 expiry for $73.00 (net of $72.22 after $0.78 commission). I need to set aside $5,300 to cover the contract for 16 days, which is 0.04384 years. That premium yields a 1.362% absolute return on the secured cash, which translates to a 31.07% annualized return. VLO closed yesterday at $54.39, which means the strike price of the contract provides 2.56% of downside protection.

The QC (Quantitative Case)


SPL (Strike Price Logic)

There was a big gap in yield premium between the $52.00 and $53.00 strikes. Considering they’re both well below my cost basis, I’m averaging down by a good bit either way. Seems like there’s support around the $54.00 ish level. $48 represents a 5% yield, but that’s too far out of the money.

QWaF (Qualitative Warm and Fuzzy)

See previous write up. While crude prices have recovered a little since December, they’re still pretty freakin’ low. VLO’s diversified capacity and domestic positioning remain compelling arguments in favor of an investment.

CPR (Cold and Prickly Risks)

Again, see previous write up. Since then, the US lifted its ban on crude exports, which took a major cost advantage away from domestic refiners. Apparently we’re also in a “gasoline glut”? I have to admit I’ve had a few thoughts creep into my head worrying about long term automobile trends in the United States and how they could be bad for refiners. Electric cars are gaining popularity. Regulations and economics are driving consumers to more and more efficient vehicles. Have we hit peak gasoline? Time will tell I guess. I think we’re going to keep burning dinosaur bones for a long time. Valero is a key player in making that possible, and they should continue to be profitable doing it.

Leave a Reply